Countdown To UK Inflation Data, Pound Sterling Firms Vs Euro And Dollar (2024)

Markets were held in tight ranges during Monday with a lack of fresh incentives and the Pound to Dollar (GBP/USD) exchange rate settled just above the 1.2700 level and very close to 2-month highs with the dollar held in tight ranges against European currencies.

The Pound will need a dollar retreat or stronger than expected UK inflation data to make a decisive break above 1.2700.

MUFG commented; “We continue to believe that the US rate market has gone too far at the start of this to remove Fed rate cut expectations leaving room for US rates to continue correcting lower after peaking out last month.”

In this context, the bank added; “Without a fresh catalyst to trigger renewed upward momentum in the week ahead, there is a risk that long US dollar positions will be cut back further extending the recent sell-off.”

As far as UK is concerned, there was further inevitable caution ahead of Wednesday’s crucial inflation data.

According to Bank of England (BoE) Deputy Governor Broadbent, there is still an important element of uncertainty over consumer spending trends; "The experience of the last two or three years has made people wary.”

He did, however, add; “Equally, as I said a moment ago, the behaviour of the economy over the last six months is reassuring."

Looking at interest rates, Broadbent added; "If things continue to evolve with its forecasts - forecasts that suggest policy will have to become less restrictive at some point - then it's possible Bank Rate could be cut some time over the summer.”

Markets are pricing in around a 55% chance that rates will be cut at the June meeting.

If, therefore, markets become more confident over a June cut, the Pound will be vulnerable to selling pressure.

In comments on Monday, Atlanta Fed President Bostic stated that; "The issue right now is when are we going to be certain that inflation is clearly on a path back to 2%. I think it's going to take a while before we know that for sure.”

Pepperstone analyst Michael Brown noted subdued market conditions; “I think after CPI passed last week the FX market is rather lacking a catalyst at this stage."

He also doubted that the rhetoric have a major impact at this stage; "While the FOMC calendar is, again, stupendously busy, it seems there’s little fresh information that speakers can add at this stage, especially with the reaction function so well-signposted, another hike all but ruled out, and a couple more promising inflation figures, at least, needed to provide the requisite confidence of inflation returning towards 2% before the first cut can be delivered."

UBS still expects rate cuts before the end of 2024; “We continue to believe recent economic data underpin our view that a return of disinflation should allow the Fed to start easing policy later this year.”

Rabobank expects the strong dollar narrative to persist; “While the USD has softened this week on the back of the easing in US CPI inflation, it remains extremely overvalued relative to many model-based estimates of fair value. On the back of a changing big picture dynamics, we see a persuasive case that the USD strength will prevail for some time.”

Markets continued to monitor Middle East developments, but conditions were relatively calm with limited gains for gold. ING commented; “Some upside risks for the dollar may also stem from a tightening in the oil market following the death of Iran President Ebrahim Raisi in an helicopter accident and some health concerns for Saudi King Salman Bin Abdulaziz. So, far the market impact of these Middle East developments has been contained.”