Pound to Dollar Rate at 11-Week High, But Has It Gone Too Far?

Pound to Dollar Rate at 11-Week High and financial trends analysis can be accessed below.

 

Newsonline reports that the Dollar suffered its deepest one-day fall in over a decade following a softer-than-expected U.S. inflation data release, a move which facilitated an unprecedented 3.15% advance in the Pound to Dollar exchange rate (GBP/USD).

 

This online news understands that the momentum could extend over the short term with analysts saying this heavily ‘shorted’ currency pair could appreciate amidst further profit-taking and position unwinding.

 

Newsonline Nigeria reports that with GBP/USD at 11-week highs at 1.1722, eyes turn to the next ‘big figure’ at 1.18. But the risk for those looking to bet on further upside in GBP/USD from here is that the technical unwind comes to an end and the Dollar finds fresh buying interest as the themes that drove it higher earlier in the year reassert.

 

“Further declines in the short term cannot be ruled out as markets unwind the long USD positions. But, let’s be clear, one data point does not signify a pivot or a change in Fed policy,” says Thanim Islam, Market Strategist at Equals Money.

 

The Dollar sunk after U.S. inflation came in softer than the market expected, leading investors to bet the peak in inflation had passed and that prices would now start trending lower.

This would prompt the Fed to ease its interest rate hiking cycle, creating breathing space for financial assets to move higher once more.

The key risk, therefore, is the Federal Reserve’s response to the data and the market’s reaction.

The Fed would be unwilling to entertain a loosening in financial conditions before seeing meaningful downward progress in inflation.

Bill Diviney, an economist at ABN AMRO, says the market reaction to Thursday’s “data may have gone too far for the Fed’s comfort, given that a significant component of the downside surprise was also due to the statistical quirk in medical inflation.”

Stocks and commodities jumped following news U.S. inflation fell to 7.7% year-on-year in October, from 8.2% in September.

Bond yields meanwhile fell, easing the cost of lending in the economy, a development the Fed could judge as being an unwelcome inflationary development.

“Services inflation overall is expected to remain elevated over the coming months, while the labour market remains much too tight. This is likely to keep Fed communication tilting hawkish in the near term,” says Diviney.

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Diviney says falling goods prices and a statistical quirk related to medical services where a -0.6% m/m reading reflected the passing-through of volatility in medical benefits payments during the pandemic period.

“This alone subtracted 0.1pp from the m/m change in the core CPI; in the absence of this, the reading would have been in line with our forecast,” says Diviney.

The Fed will push back against markets and warn further rate hikes are needed if they judge inflation is likely to prove stubborn, an assessment which could reboot the Dollar.

“Sustained demand in the face of high prices gives firms little incentive to cut prices, particularly in the service sector, which will help to keep inflation elevated through the first half of 2023,” says Jay H. Bryson, Chief Economist at Wells Fargo.

“While goods inflation is seeing meaningful relief, improvement in services will be slower-going,” says Bryson. “Inflation’s descent is still poised to be painfully slow with some bumps along the way”.

Volatility over the coming weeks is therefore set to be high and the words of FOMC members will be closely watched.

Ahead of the mid-December Fed policy decision, we will receive another jobs report and inflation report, any reversal in recent trends could spark a fierce rally in the Dollar.

“Traders are punishing the dollar and will be asking questions later. But it is important not to pin everything on just one inflation report. There are many other risks that could derail the risk rally and provide the dollar some support,” says Fawad Razaqzada, Market Analyst at City Index.