Pound's Setback Extends to $1.26 as U.S. Economic Data Beat Expectations

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A host of above-consensus economic data releases has boosted U.S. bond yields and the Dollar as investors position for further Federal Reserve rate hikes.

The Dollar advanced against the Euro, Pound and other major currencies after it was reported the U.S. economy grew 2.0% quarter-on-quarter in the first quarter of the year, which was ahead of estimates for growth of 1.4%.

The more timely weekly jobless claims report meanwhile read at 257.50K on a four-week average measure, which was below expectations for 251.27K and just slightly above the previous week's reading of 256K.

"US 2-year yield jumping on the back of lower jobless claims and stronger GDP. Yield reached 4.84%, the highest since mid-March bank stress. USD catches a bid," says Mark Chandler, an analyst at Bannockburn FX.

U.S. real consumer spending for the first quarter meanwhile rose a sizeable 4.2%, up from 1.0% previously and hinting at little impact from higher prices.

"The greenback rose after better-than-expected U.S. data backed the case for more Fed rate hikes," says Joe Manimbo, Senior Currency Analyst at Convera.

The Pound to Dollar exchange rate (GBPUSD) slide to 1.26 in the minutes following the data release as it extended a decline that followed comments from Fed Chair Jerome Powell that two more rate hikes were highly likely before the peak in interest rates is reached.

GBPUSD daily chart

Above: GBPUSD at daily intervals.

"The hawkish tone to Mr. Powell’s remarks at the ECB’s summer conference led markets to price in a greater likelihood of the Fed resuming rate increases as soon as July," says Manimbo.

The recent decline in the Pound-Dollar exchange rate comes in the context of a more pronounced uptrend that has dominated 2023, and for analysts see the decline as a retracement.

"Recent sterling weakness may be a matter of simple profit-taking, as traders lighten longs after the pound's recent rise near 2023 highs in the mid-1.28s. Sterling speculative traders had bought a gargantuan 39,873 contracts, as per the most recent IMM spec data, and with no follow-through higher may be unloading weak longs ahead of an uncertain near-term inflation and rate landscape as well as next week's U.S. holiday," says Paul Spirgel, a Reuters market analyst.

The current weakness, therefore, offers dollar sellers a window of opportunity to transact at more favourable prices.

Those with longer-term transaction timeframes will meanwhile be hoping this is more than a pullback and is the start of a more concerted downtrend.

It is notoriously difficult, and expensive, to pick market tops and bottoms, but analysts at JP Morgan are pencilling in a sustained decline in Pound-Dollar over the coming months.

In a midyear assessment, analysts say the second half of the year will be characterised by Dollar strength, while Sterling will retreat on housing market stresses and a slowing economy.

"Stay bearish GBP/USD," says Patrick R Locke, Head of FX Strategy at JP Morgan in New York. Locke and his team see value in staying 'short' higher-beta currencies such as the Pound and New Zealand Dollar, while holding a bearish slant on European FX in general.

Commerzbank is meanwhile predicting a retreat in Pound-Dollar to below 1.20 as they anticipate the Bank of England will struggle to regain credibility in tackling damaging inflation.

"The BoE seems to be chasing inflation developments rather than fighting them with an active monetary policy, which is damaging for Sterling," says You-Na Park-Heger, FX Analyst at Commerzbank.