British Pound Undermined By BoE Speculation And Dollar Gains
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The Pound to Dollar (GBP/USD) exchange rate dipped below the 1.2500 level in Asia on Wednesday with lows around 1.2470 in Europe.
A BoE rate cut is unlikely at this meeting, but there is speculation that there will be a signal that rates will be cut in June.
A less dovish stance could lead to a recovery after the decision.
According to Credit Agricole; “The GBP faced some selling interest last week, predominantly driven by algo trading flows based on FX technicals signals. Our FX flow data points at corporates and real money investors inflows, as well as banks and hedge funds outflows. All in all, the GBP remains in oversold territory.”
In comments on Tuesday, Minneapolis Fed President Kashkari stated that it was too early to consider that progress in lowering inflation has stalled.
On the possibility of an interest rate hike he commented; “That’s not my most likely scenario, but I also can’t rule it out,” he said, adding, “I think the bar for us raising is quite high but it’s not infinite. There is a limit when we say, ‘OK, we need to do more.'”
There was little net change in interest rate pricing with the chances of a July rate cut around 30%.
ING commented; “The dollar is – for once – not being influenced much by domestic drivers and may face further stabilisation in the coming days. There are some further upside risks for DXY as JPY remains under pressure and a rate cut in Sweden this morning may soften demand for European currencies.”
According to HSBC; “With the drama of the FOMC and NFP now passed, the FX market is struggling for direction.”
It added; “In the end, the debate will be resolved by the data, and really only the inflation data. The next CPI release is on 15 May.”
The underlying US debate will still be a key market element.
Danske Bank considers that the evidence overall on inflation is more positive, especially as the evidence does suggest that the labour market is cooling.
According to Danske; “Downside surprise in NFP growth was consistent with the weakening in leading April macro indicators. Declining JOLTs job openings, hiring below pre-pandemic levels, and slowing average hourly earnings growth all suggest that labour cost pressures are unlikely to drive further acceleration in inflation.”
Nevertheless, the bank has changed its view on interest rate cuts; “that said, the time is now ripe for revising our Fed call in light of the past month’s data.”
Danske now expects that rates will be cut in September and December, although it still considers that the risks are biased towards an earlier move.
Domestic data drivers overall will remain notably limited in the near term, but Fed rhetoric will continue to be watched closely.
The market narrative will change if there is compelling evidence that the US economy is deteriorating.
JP Morgan commented; “Our bullish USD view has been based on two motivating pillars: carry and US exceptionalism. The former remains intact, but the latter appears to be losing some sheen. Combined with crowded positioning and valuations make it prudent to tactically reduce USD length.
Nevertheless, it added; “But we caution it is still too early for USD bears to declare victory given still-firm US inflation and lack of visibility on the durability of the recovery outside the US as well as upcoming US elections.”
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