The pound held steady on Wednesday, nursing the previous day’s steep losses as investors waited for U.S. economic data that could shift markets. Sterling was flat against the dollar at $1.2624, after falling 0.87% the previous day in its biggest one-day drop since mid-October.
Investors returned from the holiday period with doubts about the euphoria of November and December. Falling global inflation and softer words from central banks had fueled hopes of sharp interest rate drops this year.
The dollar strengthened on Tuesday to around a two-week high, while the pound and euro slumped, reversing the trend seen over the past two months.
Data on job openings and the manufacturing sector in the U.S., as well as the minutes from the Federal Reserve’s December meeting, could potentially bring some action to the markets later in the day.
Alvin Tan, head of Asia FX strategy at RBC Capital Markets, expressed optimism about the U.S. dollar’s potential to regain ground in the coming weeks. Tan stated, In general, we remain relatively more positive on the U.S. dollar. In terms of cable (the dollar-pound exchange rate), it can get back down towards $1.24 in the next few months.
The Bank of England’s stance on inflation has supported the pound over the last two months, leading to a gain of 4.7% across November and December. However, ING strategist Francesco Pesole believes that the Bank of England’s narrative may weaken this year, affecting the pound. Pesole stated, A capitulation of the Bank of England’s higher-for-longer narrative is expected to hit the pound this year.
UK inflation fell more than expected in November to 3.9%, down from 4.6% in October. Traders are now anticipating around 140 basis points of rate cuts in 2024, which is not far off from the roughly 150 expected from the Federal Reserve and European Central Bank.
Additionally, survey data revealed that British business leaders have grown more pessimistic about the economy’s outlook. They are now calling on the Bank of England to begin cutting rates early this year.
Overall, trading in the currency market has been relatively subdued as investors await crucial economic data from the United States. The combination of factors such as job openings, manufacturing sector performance, and the Federal Reserve’s minutes from their December meeting could significantly impact currency market dynamics.
As these events unfold, market participants will be closely watching for any signs of potential shifts in monetary policy or economic conditions that could influence the value of the pound and other major currencies.
