The pound steadied on Wednesday near its highest level this year against the dollar, which it reached the previous day, as pressure on the US currency increased due to expectations of a rate cut by the Federal Reserve.
In Wednesday’s trading, the pound was little changed, reaching $1.3040, after hitting its highest level since July 2023 at $1.3053 on Tuesday. The dollar’s decline has dominated currency markets recently, as investors’ bets increased that the Federal Reserve will cut interest rates significantly this year.
The decline in US bond yields on Tuesday reduced the attractiveness of Treasuries, which led to the dollar index falling to its lowest level this year. “The movements of the pound against the US dollar this week mainly reflect the weakness of the dollar,” the head of foreign exchange strategy explained.
However, the pound remains one of the best performing G10 currencies this year, rising about 2.3% against the dollar, benefiting from the stability of the new government and stronger-than-expected economic growth.
Data last week showed the UK economy had a strong second quarter after recovering from a mild recession last year. Now, investors are awaiting revisions to US labour market data that could drive volatility in global markets.
The Bureau of Labor Statistics is due to release revised non-farm payrolls figures for April 2023 to March 2024 later today, which will be based on tax data. The weak non-farm payrolls report on August 2 contributed to a sell-off in global stocks and a rally in bonds, leaving investors worried about the US economy. Any downward revisions could reignite those concerns.
The market is also awaiting comments from Federal Reserve Chairman Jerome Powell on Friday at the Jackson Hole conference in Wyoming, which could have a major impact on market movements.
Impact of high UK borrowing and federal action on the pound
The UK government’s financial data showed that borrowing requirements in July were much larger than expected, at £19.2 billion. Despite these notable figures, they did not have a significant impact on the performance of the pound. For now, the direction depends on how the US dollar reacts to the US jobs data, FOMC minutes, and Fed Chair Powell’s comments at the Jackson Hole symposium on Friday.
The pound remains firm, approaching its highest level since mid-2023. The signs on the CPI are pointing to bullish momentum, giving the pound scope to continue its advance towards 1.3150, with support expected from dips to 1.29 levels.
The FOMC minutes will be released later today, providing further details on the Fed’s decision to keep interest rates unchanged at 5.25%-5.5%. Since the July meeting, US economic data has shown increasing weakness, suggesting that interest rate cuts could start in September. Markets are currently pricing in a 67.5% chance of a 25bp cut and a 32.5% chance of a 50bp cut.
With the FOMC minutes in the markets, traders’ attention will shift to Fed Chairman Powell’s remarks at the Jackson Hole symposium on Friday. Powell is expected to acknowledge that conditions and data are now ripe for a series of rate cuts in September. It will be interesting to see whether Powell will support the current market pricing of a 100-basis point cut this year, or whether he will resist the current assumptions. With only three FOMC meetings left this year, achieving a 100-basis point cut would require a 50-basis point move at one of the remaining meetings.
Will the pound continue to rise against the dollar in 2024?
The pound appears to be stuck in what is known as a “bull trap” against the US dollar, raising questions about whether it can continue to rise to new highs in 2024. A bull trap occurs when traders are drawn to temporary price spikes, believing them to indicate a long-term uptrend, when in reality, the spike is just a rebound within a broader downtrend.
Since August 7, the pound has seen a significant improvement against the dollar, hitting a 2024 high of 1.3053 on August 20. This surge has attracted media attention and headlines as evidence of the pound’s newfound strength. However, analyst McQueen suggests that Tuesday’s false break could signal weakness in the uptrend. A false break occurs when the price breaks a key level and then quickly deviates from it, warning of a possible pullback.
The US dollar is the driving force behind the rise in the pound, thanks to the intensification of bets that the Federal Reserve will start cutting interest rates significantly in September. This should boost stocks and increase pressure on the US dollar. However, the pound did not react significantly to recent data showing that the UK government borrowed more than expected last month. The figures highlight the fiscal challenges facing new Chancellor of the Exchequer Rachel Reeves, but they did not significantly affect the stability of the pound, which appears relatively comfortable above the 1.30 level. Overall, the pound remains in a volatile position, as traders and investors look for further signals on the direction of monetary policy and its impact on the markets.
