Dollar Firms Against Pound After ISM Provides a Reality Check on Rate Cut Bets

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The Dollar was firmer against the Pound and other major currencies after a survey of the U.S. economy showed continued growth in November and cautioned market participants against overzealous Federal Reserve interest rate cut expectations.

The Pound to Dollar exchange rate fell back to 1.26 after the ISM survey of the services sector printed at a solid 52.7, which topped analyst expectations for 52 and represented a pickup in activity from October's 51.8.

A reading above 50 is consistent with expansion, confirming the overall growth rate in the largest sector of the U.S. economy remains healthy.

"To the extent that the service sector keeps humming along, it could dash the rising hope in financial markets that rate cuts are just beyond the horizon," says Tim Quinlan, Senior Economist at Wells Fargo.

The Dollar fell through November as markets brought forward expectations for the timing of Fed rate cuts, judging that inflation and economic activity have fallen fast enough to warrant such a move.

"As long as services outlays remain robust, there is little incentive for service providers to lower prices," says Quinlan.

Should incoming data suggest the economy is more robust, which would be consistent with a moderation in inflation's decline, rate cut expectations would likely retreat.

This would be supportive of the Dollar.

"The Fed’s aggressive hikes are yet to make a meaningful dent to services activity, unlike the manufacturing sector, where the bulk of the tightening is reflected in the weak activity numbers," says Kieran Clancy, Senior U.S. Economist at Pantheon Macroeconomics.