Pound Sterling Blocked At Key Resistance Areas, Holds 2-Month Highs Vs Dollar

The Pound overall has held firm in the global markets with the Pound to Euro (GBP/EUR) exchange rate again testing the key resistance area around 1.1765 without being able to break through.

The Pound will gather fresh energy if GBP/USD can break above 1.28 and especially if GBP/EUR moves above 1.1765.

There were no major domestic developments during the day while equity markets moved lower with a 0.9% retreat for the FTSE 100 index.

Weaker equity markets will tend to be a headwind for the Pound.

US consumer confidence rebounded to 102.0 for May from a revised 97.5 the previous month and above consensus forecasts of 96.0.

A further decline on the month would have been the lowest reading since July 2022.

The current conditions index edged higher to 143.1 from 140.6 in April while the expectations component improved strongly to 74.6 from 68.8, although this was still in recession territory.

According to Dana M. Peterson, Chief Economist at The Conference Board, “Confidence improved in May after three consecutive months of decline. Consumers’ assessment of current business conditions was slightly less positive than last month. However, the strong labor market continued to bolster consumers’ overall assessment of the present situation.”

The data will offer some reassurance over near-term consumer spending trends, although there is still an important element of uncertainty.

ING commented; “The big question for US domestic demand is whether spending from the top 20% of households by income can continue to offset the struggles faced by the bottom 60%. ING’s call is that higher rates will eventually take their toll on consumption and weigh on US growth through the year.”

There will be an on-going debate surrounding the overall economy, inflation and interest rates.

MUFG notes that there has been an important debate surrounding the potential neutral rate for interest rates.

This will have an important impact on implications for shorter-term interest rates.

If the natural rate has increased, it will be much more difficult for the Federal Reserve to cut interest rates significantly.

US data will continue to be watched very closely.

MUFG commented; “this increased debate on the implied neutral policy stance could have an increasing impact on lifting market yields if the economy fails to slow. It’s early days since the FOMC minutes highlighted the debate on the restrictiveness of the policy stance that means the markets might now be more sensitive to incoming data that is stronger than expected – like last week’s PMI data that doesn’t tend to move markets much.

ING noted the importance of the US economy for global markets; “At the heart of this story are investors positioning once again for a soft US landing. Central to this will be Friday’s release of the core PCE inflation data for April.

It added; “Having taken inputs from the already released April CPI and PPI figures, consensus now expects Friday’s figure to come in at a benign 0.2% month-on-month. Such an outcome can rebuild expectations for a September Federal Reserve rate cut (now priced with a 44% probability) and prove bearish for the dollar.”

According to Bank of America; “We do expect USD to eventually depreciate by year-end but more likely when we are closer to Fed rate cuts. We have previously argued services deceleration (vs. manufacturing) is a necessary for USD depreciation (as it is symptomatic of US recoupling with the rest of the world).”

It added; “While this is increasingly evident in surveys, it matters more for the medium-term USD trend, in our view, than the near-term outlook.”