Pound to Dollar Rate Trades Above 1.25 as US Growth Doubts Keep GBP Afloat

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May 14, 2024 – Written by John Cameron

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The Pound to Dollar (GBP/USD) exchange rate held above 1.2500 on Friday, but was unable to build on gains seen after the UK GDP data and held below 1.2550 with the pair consolidating around 1.2530 on Monday amid a softer dollar.

The dollar overall has tended to struggle against European currencies, especially with some further survey evidence of a weaker US economy.

The survey data has continued to indicate an increased risk of stagflation within the economy.

The latest University of Michigan consumer confidence index data recorded a slide to a 6-month low of 67.4 for the preliminary May reading from 77.2 in April and compared with consensus forecasts of 76.0.

Paul Ashworth, chief North America economist at Capital Economics commented; “It is hard to explain given that, there is little evidence of any major downturn in the labor market. Households could also still be reacting to the earlier selloff in equities around mid-April.”

He added; “It could also be due to other non-economic factors like the upcoming election, the brief Israel-Iran conflict or the spread of pro-Palestinian protests across college campuses. It might simply be noise rather than signal.”

According to MUFG; “More recently, the run of US economic data at the beginning of Q2 has started to disappoint. The widely followed Citi US Economic Surprise Index on Bloomberg has fallen into negative territory and to the lowest level since January of last year. It highlights that the recent run of upward revisions to US GDP forecasts is coming to an end.”

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It added; “The risk of a bigger correction lower for the USD would increase in the coming months if hard evidence begins to emerge as well backing up the soft survey data that is pointing towards much weaker US growth.”

The Michigan’s survey’s reading of 1-year inflation expectations increased to 3.5% in May from 3.2% in April, remaining above the 2.3%-3.0% pre-pandemic range.

The 5-year inflation outlook increased to 3.1% from 3.0% in the prior month.

Inflation expectations will remain important, especially if momentum towards lower inflation continues to stall.

There are important US data releases this week with the producer prices data on Tuesday and consumer prices release on Wednesday.

ING commented; “After the dovish FOMC meeting and the soft April NFP sucked the momentum from the dollar’s upside, the question is whether price data can actively contribute to the dollar’s downside.”

It added; “The bigger risk of that probably comes tomorrow, where any softer PPI readings could point to a lower core PCE deflator figure (the Federal Reserve’s preferred inflation reading) on 31 May.”

MUFG added; “A fourth consecutive monthly upside inflation surprise is required to inject fresh upward momentum into US rates and the USD in the near-term. Whereas in line or softer prints could see the USD give back more of the gains from the start of this year.”

As far as the UK economy is concerned, labour-market data will be the next key set-piece event with a particular focus on wages.

Consensus forecasts are for a slowdown in the annual increase in headline wages growth to 5.3% from 5.6% with a slight slowdown in underlying earnings growth to 6.0% previously.

Stronger than expected wages growth would make if more difficult for the BoE to move closer to interest rate cuts.

This would also provide near-term Pound support, although longer-term fundamental concerns would also be significant with the UK also at risk of increased stagflation fears.

The Resolution Foundation has warned that increases in real wages will be unsustainable. According to Research Director Greg Thwaites; “Unless productivity picks up, wage growth will peter out, or pay rises will simply be passed on through higher prices and prolong our inflation problems.”

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