October 25, 2024 – Written by Frank Davies
STORY LINK Pound Sterling: UK Data Damages GBP/USD Rally Attempt from 10-Week Lows
The Pound to Dollar (GBP/USD) exchange rate dipped sharply to 10-week lows just above 1.2900 on Wednesday before a tentative recovery to 1.2955.
Weaker than expected UK business confidence data hampered the Pound, but the dollar retreated from 10-week highs amid a decline in US yields which provided some GBP/USD respite.
UK yields also moved higher as markets contemplated a shift in UK fiscal rules which is likely to increase gilt issuance and risks unsettling the UK bond market.
According to UoB; “The price action indicates GBP could decline further to 1.2860. On the upside, the ‘strong resistance’ level has moved lower to 1.3000 from 1.3060.”
The UK flash PMI manufacturing index retreated to a 6-month low of 50.3 for October from 51.5 previously and compared with consensus forecasts of no change.
The services-sector index also retreated to an 11-month low of 51.8 from 52.4 and below expectations of a marginal retreat.
Employment declined for the first time in 2024.
Inflation evidence was mixed as input prices increased at the slowest rate since November 2020, but inflation for output prices increased to a 3-month high.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence commented; “gloomy government rhetoric and uncertainty ahead of the Budget has dampened business confidence and spending.
He did, however, add; “a further cooling of input cost inflation to the lowest for four years opens the door for the Bank of England to take a more aggressive stance towards lowering interest rates, should the current slowdown become more entrenched.”
Bank of England Governor Bailey commented that; “Disinflation is happening I think faster than we expected it to.”
Bailey was still cautious over services-sector inflation “We’ve got to see services prices inflation come further down. It’s grinding down, but we do have these outstanding questions as to whether we’ve seen some structural change which is going to in a sense cause that to become more sticky.”
Fiscal policy also remains a key element for Pound sentiment.
S&P Global Market Intelligence’s Williamson commented; “Cleary, the policies announced in the Budget have the potential to play a major role in steering the direction of the economy in the months ahead.
On Thursday, Chancellor Reeves is set to announce a change to UK fiscal rules with expectations that there will be a change to target public sector net financial liabilities (PSNFL)
This technical change would increase potential medium-term borrowing for investment by £50bn.
There will, however, still be substantial tightening of current spending through tax increases.
The dollar retreated on Thursday following a relatively weak Beige Book of economic conditions with the 10-year yield declining to below 4.20%.
ING expects only a temporary dollar setback; “volatility will probably rise into the 5 November election, and assuming that Donald Trump continues to perform well in the polls, the dollar should stay bid.”
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TAGS: Pound Dollar Forecasts
