Pound To Dollar Rate Just Below 1.28 As Sterling Sentiment Holds Firm

The Pound to Dollar (GBP/USD) exchange rate found support just above 1.2760 on Thursday and briefly advanced to above 1.2800 after the US producer prices data before settling around 1.2785 as markets continued to react to US developments.

The Pound to Euro (GBP/EUR) exchange rate retreated to 1.1825 before a move to 1.1845 as overall Pound sentiment held firm.

As far as the UK General Election is concerned, the Conservative campaign remains in difficulties and there is increased speculation of a huge Labour victory.

There has been no sign of any shift in sentiment towards the Pound and, according to Scotiabank; “Sterling remains at ease with the prospect of a substantial Labour majority.”

It added; “GBP retains the advantage of solid and bullishly-aligned trend strength oscillators which should mean limited downside movement and ongoing pressure on 1.28+ levels.”

US producer prices declined 0.2% for May compared with expectations of a 0.1% increase with the year-on-year rate edging lower to 2.2% from 2.3%.

Core prices were unchanged on the month compared with expectations of a 0.3% increase with a retreat in the annual rate to 2.3% from 2.5% and below expectations of 2.4%.

The producer prices data built on the favourable reading for consumer prices on Wednesday.

According to ING; “A soft PPI reading today will raise expectations of another ‘on-target’ 0.2% month-on-month core PCE reading and give both the Fed and the market a little more confidence that the central bank may be able to cut rates in September after all. This is why we have a down arrow on the dollar today.”

MUFG added; “the CPI indicates that the core PCE deflator could increase by just +0.1%M/M in May which would help bring the annual rate closer to 2.5% as it continues to move towards the Fed’s 2.0% target.”

According to Scotiabank; “PPI will have less of a direct market impact perhaps following the CPI data and FOMC yesterday but soft data will bolster market views that swaps pricing for the Fed is a better reflection of risks than the dot plot.”

Initial jobless claims also increased significantly to 242,000 in the latest week from 229,000 previously which was above consensus forecasts of 225,000 and the highest reading since early August 2023.

Continuing claims also increased to 1.82mn from 1.79mn and the highest reading since February 2024.

Although the data is volatile, there will be further speculation that the labour market is softening.

Following the data, markets priced in around 67% chance of a September rate cut compared with near 60% after Wednesday’s Fed statement.

The updated Federal Reserve forecasts suggested that the committee will only cut interest rates once in 2024, although a substantial minority of members expect two cuts.

As far as the Bank of England is concerned, traders remain confident that there will be one cut with a considerable number of investment banks expecting two cuts.

It is, therefore, possible that either the Federal Reserve could deliver more rate cuts than the Bank of England this year or the opposite will be the case.

Interest rate expectations will remain in a state of flux and there is the scope for further shifts in sentiment which will have significant implications for the Pound.

According to MUFG; “The Fed delivering multiple rate cuts remains a key assumption behind our forecast for a weaker US dollar in the 2H of this year.”

Rabobank added; “We still expect the Fed to cut in September and December, more likely because of a deteriorating economy than because of progress on inflation.”

According to Nomura there are some Pound risks; “Because market pricing is already so hawkish, there are risks of a larger market reaction if the BoE appears relatively unconcerned about recent strong data. We continue to expect two BoE cuts this year in August and November.”