PoundSterlingLIVE - Pound Sterling is favoured over the Dollar this week thanks to an improved technical setup, a well-understood Fed rate cut repricing story and month-end flows.
Friday is March 01 and we could see some opportunistic spikes in the Pound to Dollar exchange rate as month-end rebalancing is expected to see USD selling after February's strong U.S. stock market performance.
"The approaching February month-end could see USD-selling from real money investors who rebalance their global equity portfolios. Indeed, we note that months during which the global stock markets have rallied typically saw the USD come under pressure at month-end on the back of rebalancing hedging flows," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.
U.S. markets continue to print record-highs, egged on by the Magnificent Seven technology stocks and AI darling Nvidia (NASDAQ:NVDA), potentially making for some decent USD selling into month-end as portfolio managers rebalance FX exposure.
Technical considerations also support near-term upside moves for the Pound: "GBP-USD has managed to recover back above 1.2650, keeping a re-test of the 1.27 area open," says Roberto Mialich, FX strategist at UniCredit (LON:0RLS) Bank in Milan.
"GBP/USD looks to have found some decent support at its 50-week moving average and is showing signs of another run towards the top of its 2-month range," says George Vessey, Lead FX Strategist at Convera.
Vessey says the 50-day moving average, at $1.2675, is the next upside barrier, after which the 200-week moving average at $1.2850 comes into focus.
"Upward momentum has increased slightly,” says Quek Ser Leang, Markets Strategist at United Overseas Bank, "GBP/USD is likely to edge higher towards the major resistance at 1.2690."
Leang says that at this time, it is not clear if GBP can break and stay above this level. "From here, the risk of GBP rising towards the next major resistance at 1.2735 is not high.
To the downside, Leang says only a breach of 1.2600 (‘strong support’ level previously at 1.2565) would mean that the upside risk has dissipated.
There are no events out of the UK this week to bother UK interest rate pricing and the Pound, and anyway, the Dollar has been in the driving seat in 2024.
The USD has outperformed as markets lower expectations for the number of rate cuts to be delivered by the Fed this year, thanks to above-consensus economic data releases that paint a picture of a strong economy.
We will need to see incoming data beat expectations by a handsome margin if this trade is to extend.
Preliminary U.S. GDP for the final quarter of 2023 is released Wednesday at 13:30 GMT; consensus looks for a reading of 3.3% year-on-year annualised, unchanged on the previous quarter. This is the second revision (despite the 'preliminary' tag it officially carries!) for this period and is unlikely to alter USD values.
Thursday also sees the weekly job claims data release, which offers insight into how the labour market is progressing; we have seen some decent FX reactions in the past weeks on misses in either direction.
However, the PCE inflation figures will likely attract the market's attention as this is an inflation measure that the Federal Reserve is particularly interested in.
"PCE is the Fed’s favourite measure of inflation. A hotter-than-expected print should keep the greenback supported," says Fawad Razaqzada, an analyst at City Index.
The headline PCE is expected to have risen 2.8% year-on-year in January and 0.3% month-on-month, with any deviation on these expectations potentially moving the market.
Given the significant decline in rate cut expectations seen in 2024 due to upside inflation surprises, we expect the biggest USD reaction to be to the downside on any undershoot in the data.
Friday sees the release of the ISM Manufacturing PMI, often a market-moving event, where the market expects a reading of 49.5.
An original version of this article can be viewed at Pound Sterling Live