UK economic data supports pound, households appear to be managing higher interest rates 

Pound sterling gained ground against the dollar on Thursday, driven by increased demand for loans among British borrowers and the resilience of business services in the UK.  

Net borrowing data revealed the highest demand for loans by British consumers in almost seven years in November, indicating that households are managing with higher interest rates. Additionally, the UK Services Purchasing Managers' Index (PMI) showed stronger growth among Britain's services firms in December than initially estimated, with optimism reaching a seven-month high. 

Jane Foley, Head of FX Strategy at Rabobank, commented on the data release to the Reuters news agency: 

"UK mortgage approvals and lending data are better than expected suggesting that the market could be in danger of repeating the mistake of a year ago in pricing in too much pessimism. The firmer data also pushes back on hopes for early and aggressive BoE rate cuts in 2024." 

Traders are anticipating potential interest rate cuts in 2024, with around 140 basis points priced in for the Bank of England (BoE). Rabobank expects the BoE to maintain interest rates until the second half of the year. Sterling, which had experienced a significant one-day drop earlier in the week, was up 0.24% against the dollar at $1.2692. 

Euro to dollar rate: Common currency gains on greenback as Germany’s inflation rate grows 

The euro also rebounded as markets anticipated an increase in headline inflation in the eurozone's December data.  

Preliminary data showed French consumer prices rising in line with expectations, while Germany reported an increase in consumer price inflation to 3.8% in December — less than the 3.9% predicted by economists but up from 2.3% in November. The German reading reflects a more muted rise from energy prices that may soften wage demands and facilitate a faster return to the European Central Bank’s inflation target of 2%. 

The euro to dollar exchange rate rose 0.20% to $1.0945. 

While inflation in the eurozone is anticipated to rebound to 3% in the figures scheduled for release on Friday, analysts predict that the slowdown, which began in November 2022, will likely resume as the year progresses. 

Francesco Pesole, FX strategist at ING, wrote in a note to clients: 

"There are some risks that a higher headline print will prompt some repricing of the highly dovish ECB rate expectations”. 

Martin Ademner at Bloomberg Economics said the “overall trend was down”, meaning the ECB was likely to cut interest rates in June:
 

“For the ECB, rising inflation in the euro area’s biggest economy is inconvenient, but the overall trend is down — we see the first rate cut in June, at the latest”.

DXY index: Dollar index falls as Fed meeting minutes provide limited insight into potential cuts 

The U.S. dollar index (DXY), a gauge of USD’s strength against a basket of major currencies, fell 0.02% to 102.29.  

Despite reaching a three-week peak on Wednesday, the greenback weakened as the minutes of the Federal Reserve's December meeting provided limited insight into the timing of potential interest rate cuts. The CME FedWatch tool indicated a decreased likelihood of an interest rate cut in the U.S. in March, with market pricing showing a roughly 64% chance compared to 87% a week earlier. 

In other currency movements, the dollar reached a more than two-week high against the Japanese yen, rising 0.62% to 144.19 as Japan returned from an extended New Year break. 

GBP to USD forecast: Scotiabank says cable may stall or reverse in the low 1.27s 

In a pound to dollar forecast issued on January 4, Shaun Osborne, Chief Currency Strategist at the Toronto-based Scotiabank, wrote that he was neutral/bearish on the GBP/USD exchange, adding that it could “stall or reverse” in the low 1.27 range: 

“Sterling gains reflect firmer data reports as well as the broader softening in the USD on the session but scope for additional strength is limited in my view amid the broader trend reversal in the USD seen over the turn of the year.

Intraday gains in cable are showing signs of stalling or reversing in the low 1.27s. Intraday support at 1.2685 may come under pressure in the North American session. Loss of support here should see the GBP pushed back to the 1.2625/30. Resistance is 1.2725/30”. 

In the January issue of ING’s FX Daily, strategist Francesco Pesole said the bank continues to see “downside risks” for the GBP to USD currency pair in the near term: 

“Cable has recovered some of the earlier-week losses, but we continue to see downside risks extending to the 1.2500 mark in the short run (due to USD outperformance) before a clear-cut upside trend is formed again”. 

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