Pound US dollar exchange rate erases gains on dovish forecast
(Updated: 30/07/2024, 16:20) The pound US dollar exchange rate sank on Tuesday afternoon, incurring losses once again as interest rate cut bets for the Bank of England (BoE) proliferated.
Hopes that the UK’s central bank may keep interest rates on hold on Thursday faded, to be replaced with more certain bets for an unwinding of monetary policy. A lack of clear signalling from the BoE failed to prevent markets from assuming a dovish outcome.
Spurring such bets are various remarks from economists. Benjamin Jones, director of macro research, Invesco, observes:
‘The UK inflation picture today is better than many other developed markets giving the Bank of England an excuse to cut on 1 August. If it doesn’t, it may find that inflation data make it hard to justify a rate cut later in 2024.’
There are several analysts who remain cautious of forecasting the outcome of the bank’s decision – but widespread expectations of policy loosening are sufficient to dampen Sterling appeal.
Original article continues below:
GBP/USD exchange rate rises as fiscal policy jitters abate
The pound US dollar (GBP/USD) exchange rate traded up overnight, recovering some of yesterday’s losses over Britain’s ‘black hole’ in public finances. While cautious trading sentiment lent some support to the US dollar (USD), a lack of significant data this morning capped ‘greenback’ tailwinds.
At the time of writing, GBP/USD is trading at $1.2863 – having firmed by approximately 0.2% in the past 24 hours.
Pound (GBP) regains recent losses
The pound (GBP) is firming against its peers this morning following yesterday’s steep descent. Fears that a £20bn ‘black hole’ in public finances left by the previous government could result in imminent tax hikes were assuaged by comments from cabinet office minister Pat McFadden, who said:
‘Today is not about tax increases, today is not a budget, today is about, I am afraid, some very difficult spending decisions that the chancellor is going to be setting out.’
In her speech on Monday afternoon, Chancellor Rachel Reeves addressed the country’s fiscal situation, announcing spending cuts that would affect winter fuel payments for the elderly, social care charging reforms and highways infrastructure. As promised, tax cuts were not announced.
As Sterling regained its losses, morale may also have been supported by a sweep of bullish sentiment regarding the Bank of England (BoE)’s upcoming monetary policy decision. Bets for an interest rate cut are falling back as economists remain divided over whether the central bank will loosen restrictive policy on Thursday.
Michael Brown, senior research strategist at Pepperstone, captures the general sentiment:
‘The August decision is, perhaps, one of the toughest MPC decisions to forecast…in recent memory.’
Yet expectations for a rate cut are still in the majority, with markets pricing in the chance of a 25bps reduction at a little over 58%. Uncertainty over the situation limits pound tailwinds, capping GBP/USD gains.
US dollar (USD) trends sideways ahead of JOLTs data
The US dollar is trading sideways against several peers today, as ‘greenback’ optimism is limited by expectations of a decrease in job openings, as well as trepidation ahead of the Federal Reserve’s monetary policy decision tomorrow.
Today’s JOLTs release is expected to reveal a continued cooling in the US labour market, as restrictive monetary policy conditions limit hiring practices. While economists suggest that the impact of the data is likely to be limited if the release prints as forecast, a reduction in job openings could fuel the case for looser monetary policy.
The Fed is expected to leave interest rates unchanged tomorrow, but investors and economists will be listening out to have expectations of a September interest rate cut confirmed. If the US central bank strikes a dovish tone, USD could weaken.
On the other hand, the prospect of reduced interest rates will come as a relief to most US citizens and businesses. Claudia Sahm, chief economist at investment management firm New Century Advisors and former Fed economist, remarks:
‘[The Fed’s high target interest rate] is putting pressure on the economy, is making it harder for consumers to buy. They have to take out credit. It’s making it harder for businesses to invest.’
As markets await the central bank’s upcoming announcement, further ‘greenback’ movement may be limited.
GBP/USD forecast: exchange rate to pivot on US data?
The pound US dollar exchange rate faces limited trading stimuli this afternoon, but if the US JOLTs data prints far above or below expectations, consequent US dollar movement could trigger a shift in GBP/USD.
Elsewhere, comments from central bank officials may alter the exchange rate’s trajectory, alongside other external factors including risk sentiment. As the UK’s new Labour government get their affairs in order, further commentary regarding the state of public finances could spark pound headwinds.