GBP/USD at New Highs On Raft of Favourable Data

"Inflation is coming down, but we need to be aware of the risk that, at the core level at least, there still might be room for upside surprises. At the headline level the key risk is energy prices rising again" - AXA Investment Managers.

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The Pound to Dollar exchange rate climbed in the final session of the week to reach new highs for the fledgling year at times after being lifted on a raft of favourable economic data from both sides of the Atlantic with the latest being an easing of consumer expectations for U.S. inflation.

Dollars exchange rates were a mixed bag throughout Friday trade but with most of them falling soon after the North American open and following the release of University of Michigan (UoM) survey data suggesting that consumer confidence rose and inflation expectations moderated in January. 

"The soft-landing camp will find plenty to like in today's preliminary read of consumer sentiment from the University of Michigan," says Tim Quinlan, a senior economist at Wells Fargo Securities. 

"Consumers may not feel awesome about their finances, but they are undoubtedly less worried than they were when gas prices were north of $4/gallon and wage growth wasn't keeping up with inflation," he adds. 

The UoM consumer sentiment index leapfrogged economist expectations when rising from 59.7 to 64.6 for January just as expectations for inflation over the year ahead fell from 4.4% to 4% in a development that might be welcomed by the Federal Reserve (Fed).

Above: GBP/USD at hourly intervals alongside AUD/USD and EUR/USD. Click image for closer inspection. 

"One-year inflation expectations fell by 0.4pp to 4.0%, the lowest since April 2021, but five-to-10-year expectations nudged up a tenth to 3.0%. That’s likely noise rather than signal," writes Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a review of the data.

"This measure has been stuck close to 3% since the summer of 2021. But it is sensitive to food and gas prices, and we expect it to drop over the next few months, returning to the pre-Covid trend, about 2-1/2%. Inflation expectations are coming back under control," he adds. 

Friday's UoM numbers came hard heels of data from the Office for National Statistics showing a surprise 0.1% increase in GDP for the month of November, which indicates the UK economy may have narrowly avoided a second successive contraction for the final quarter. 

A second contraction would mark the beginning of a widely anticipated recession that most forecasters expect will last at least the duration of the current year, and many do still retain reservations about the outlook.

"That said, growth in construction was flat and has clearly been trending down through the course of this year. Combined with the signal from the recent sharp drop in mortgage approvals, the UK housing market is cooling," says Michael Cahill, a G10 FX strategist at Goldman Sachs. 

Above: Pound to Dollar rate shown at daily intervals. If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.Click image for closer inspection. 

"While we think the near-term outlook will likely be choppy, we do expect phases of Dollar strength in coming months given the structure of housing finance in the US means that rate increases pass through more slowly than in other G10 countries, such as the UK," Cahill adds in Friday commentary.

Though economic numbers were broadly positive for the Pound to Dollar rate on both sides of the Atlantic Friday, the highlight of the week was Thursday's release of U.S. inflation figures for December, which placed the prospect of a monetary policy victory over inflation within reach for the Fed. 

U.S. inflation met expectations when falling from 7.1% to 6.5% in December but the details of the data suggested it would have fallen even further if not for a large year-end increase in housing costs known as shelter prices.

But rising shelter prices are a temporary side effect of earlier increases in the Fed Funds interest rate and Federal Open Market Committee members expect them to come down again in the months ahead, potentially intensifying the downward pressure on the overall inflation rate.

"Inflation is coming down, but we need to be aware of the risk that, at the core level at least, there still might be room for upside surprises. At the headline level the key risk is energy prices rising again," warns Chris Iggo, chair of AXA IM Investment Institute and CIO for AXA IM Core.

Above: Pound to Dollar rate shown at weekly intervals. Click image for closer inspection.