Can Cable Sustain Recent Gains Post US GDP

The Anglo economies continue to differentiate from other major countries, but cable remains strong on a BOE that cannot afford to be more dovish.

The Market Grows More Confident

The US dollar has weakened over the last week as investors debate whether the Federal Reserve will cut interest rates by 50 basis points at the September or October policy meetings. For now, the latter option appears more likely. However, following comments from Fed Chair Jerome Powell that the jobs market would not be a source of inflation in the near future, markets are closely watching upcoming Nonfarm payroll data to see if the situation has changed and the Fed's secondary mandate around full employment comes into play. If the NFP show significant weakness, the Fed may need to take more aggressive easing action to meet its goal of maximum employment.

Labour data is also key to another concern: the potential for a sharp economic slowdown. Markets are betting on a soft landing where the Fed eases policy, inflation remains low, but economic activity stays strong enough to support business growth. However, a rebound in the economy risks renewing inflation concerns. The second estimate of US Q2 GDP growth is due on Thursday, expected to confirm the initial annualised rate of 2.8%. This showed a recovery from the 1.4% growth in Q1, hoping to mark the year's low point.​

Rate Outlook and Impact on the Pound

While investors consider how much the Fed may reduce interest rates, economists are projecting the BOE will only ease policy once more this year. This puts monetary policy in the UK further behind and more restrictive than its two main counterparts. The ECB is forecast to cut rates three times and the Fed four times. As a result, the pound has strengthened against the US dollar since the start of the month as investors revised down their expectations of US economic strength.

The UK economy continues growing at around 2.4% annually, similar to the US. However, it is expected to slow over the remainder of the year, reaching 1.5% growth by the end of 2024, while the US is expected to grow at 2%. Wage growth in the UK remains elevated, outpacing inflation and maintaining upward pressure on prices. Unlike the EU, the BOE has more flexibility in controlling inflation as the UK economy remains broadly positive. Unless data shifts views on how dovish the Fed's policy stance will be, the pound could outperform other major currencies throughout the year.​

Cable Breaks to 30-Month High

Cable recently reached its highest level in 2 ½ years, breaking out of the rather slow upward trend seen over the year or so. After forming a broadening diagonal pattern, sterling strengthened to hit 1.3269 against the greenback. Should the upward momentum continue, the next key level is at the projected measured move of 1.3425, with interim ceilings the round 1.33 and 1.34 handles. Conversely, a drop below 1.3182 could open the door to 1.3049 if 1.3095 is breached, allowing for a potential bounce or further decrease towards 1.2895.

Source: SpreadEx

Key Takeaways

The US dollar has weakened as markets debate the likelihood of a 50 basis point cut in September or October by the Fed following comments from Powell on future inflation and employment. Upcoming jobs data will be key in determining further monetary policy action. While the Fed is expected to cut rates four times this year, the BOE is only forecast to ease once due to the UK economy maintaining growth of around 2.4% annually with continued wage inflation, keeping sterling competitive against the dollar, barring a stronger shift in the Fed's policy outlook.​