Pound To Dollar Rate Trades Above 1.27 As US Economic Doubts Continue

On Thursday, US Treasury markets again dominated currency markets with position adjustment also a significant element.

After sharp losses during the previous two days, Treasuries managed to rally during the day with the decline in yields sapping support for the US currency.

From May highs above the 4.60% level, the 10-year yield retreated to 4.56%, although risk appetite was fragile and Wall Street continued to post net losses.

European currencies overall made headway with the Euro to Dollar (EUR/USD) exchange rate also finding support below 1.08 and recovering to 1.0835.

The Pound to Dollar exchange rate found support below 1.2700 and rebounded to 1.2725, but the Pound was unable to make any headway against the Euro.

The Swiss franc also posted significant gains after a warning from National Bank Chair Jordan that a weaker currency was putting some upward pressure on inflation.

ING commented; “We do not think there is a case for a much weaker EUR/USD unless this bond sell-off has another leg to go.”

US first-quarter GDP was revised down to 1.3% from the flash reading of 1.6% and in line with consensus forecasts. This followed the 3.4% reported for the fourth quarter of 2023.

Consumer spending growth was revised down to an annualized rate of 2.0% from 2.5%.

The PCE prices index was revised marginally lower to 3.3% from 3.4% with the core prices index also revised slightly lower to 3.6% from 3.7%.

Initial jobless claims edged higher to 219,000 from 216,000 previously and in line with market expectations while continuing claims were unchanged at 1.79mn.

According to David Russell, global head of market strategy at TradeStation; “Prices and consumption were both light in the GDP report. Jobless claims were also higher than expected and the trade deficit was wider. These numbers all point to slower growth and slower inflation. It keeps hopes of a rate cut alive.”

The dollar overall has lost ground during May with some pick-up in reservations over the US economic performance.

According to Credit Agricole; “This USD reversal has coincided with the fact that the relative outperformance of the US economy vs most other developed economies, and Europe in particular, took a dent from the first GDP releases for Q124.”

ING commented; “Tomorrow’s April inflation data is more likely to set the next meaningful dollar trend.”

As far as the PCE prices data is concerned, consensus forecasts are for the headline inflation rate to hold at 2.7%.

The core rate is forecast to increase 0.3% on the month with the annual rate remaining at 2.8%.

Weaker than expected data would trigger fresh speculation over a rate cut before the end of the third quarter while stronger-than-expected data would lead to fresh fears over the possibility of an interest rate hike.

Following the GDP data, there was a limited shift in Federal Reserve pricing with markets again pricing just over a 50% chance that rates would be cut at the September policy meeting.

There were no significant UK data releases during the day with markets monitoring developments in equity markets.

The FTSE 100 index managed to rebound from 3-week lows which provided an element of relief for the Pound.

Markets are also assuming that a June Bank of England rate cut is off the table, especially given that the UK General Election campaign will remain in full swing at the time of the next meeting.

Traders will, however, still be looking at the potential medium-term timing of rate cuts with increased doubts whether an August cut will be sanctioned.

ING commented; “We think the market has gone too far with this pricing. We’re going for an August rate cut, we’re pretty confident about that.”