Pound to Dollar Rate Outlook: 10-Day Best Ahead of Crucial US Inflation Data

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May 15, 2024 – Written by David Woodsmith

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The Pound to Dollar exchange rate (GBP/USD) secured gradual progress on Tuesday and advance to 10-day highs just above 1.2600 on Wednesday.

Three major US data releases during the day will be crucial for near-term GBP/USD direction with a potential-jump if inflation data is benign while there will be a sharp dip if the data is higher than expected.

Dollar support has been eroded by a limited retreat in US yields while European currencies have been resilient amid optimism over a rebound in growth.

Reports that China was looking to ease the domestic housing overhang also provided support for European currencies.

The Euro to Dollar (EUR/USD) exchange rate, for example, has strengthened to 1-month highs just above 1.0830.

Overall risk conditions have also remained benign with net gains in equities also helping to underpin the Pound.

Domestic influences are likely to be limited for the Pound in the near term with little change in expectations surrounding interest rate expectations ahead of the huge UK inflation print on May 22nd.

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The latest US inflation data will be crucial for near-term dollar direction and be a key influence on GBP/USD moves.

Danske Bank commented; “The US April CPI print is by far the most pivotal data point this week. Any surprise in either direction will have repercussions for the broad FX markets. Given that our expectations align with consensus estimates, the market reaction could be relatively limited if we are correct, with a slight tilt towards lower US yields and, consequently, a weaker USD.”

Consensus forecasts are for a 0.4% increase in consumer prices for April with the year-on-year rate edging lower to 3.4% from 3.5%.

The principal focus will be on core prices with expectations of a 0.3% monthly increase.

The potential variance in the data may seem relatively limited, but there will, for example, be a big market reaction to small changes in the data.

A 0.4% increase in core prices would trigger further alarm over inflation trends while a 0.2% figure would provide important relief.

In particular, there will be a significant impact on interest rate expectations.

At this stage, the chances of a July Fed rate cut are seen at below 30% while the chances of a September move are around 65%.

Inflation data will have an important impact on these expectations.

MUFG commented; “Including today, there are three CPI reports before the July FOMC meeting so we certainly should not rule out July for a first rate cut if that meeting follows three favourable CPI reports.”

MUFG added; “After three upside surprises in the CPI data we would lean toward a more favourable report today that would help maintain the current momentum.”

The bank also noted that the dollar has been losing ground and commented; “A CPI print that doesn’t contain any nasty upside surprise would probably be enough for this current move weaker for the dollar to be extended.”

ING is optimistic that relatively low volatility will continue; “If we are right with CPI today, then there is a good case for markets defaulting to a directionless and low volatility environment for longer, which can imply a rangebound dollar.”

Barclays commented; “While we’d expect it (the CPI data) to remain too elevated for the Federal Reserve to feel confident that the time has come to start cutting interest rates, it would mark a step in the right direction.”

The US will also release the latest retail sales data with consensus forecasts for a 0.4% increased after a 0.7% advance the previous month.

Business confidence data will also be an important element with the New York Empire manufacturing survey released on Wednesday.

Markets expect that there will be a limited net improvement to -10.0 from -14.3 the previous month.

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