**Beware: Pound to Dollar May Have Peaked Warns Apollo’s Slok**
*By James Skinner, adapted and expanded from PoundSterlingLive.com*
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The pound to dollar (GBP/USD) exchange rate could have reached its peak for this cycle, warns Apollo Global Management’s Chief Economist, Torsten Slok. This caution comes amid shifting foreign exchange (FX) market dynamics that are forcing analysts and investors alike to re-examine their USD and GBP strategies for the second half of 2024.
The GBP/USD exchange rate has enjoyed a period of relative strength, spurred by expectations of diverging monetary policies between the Bank of England (BoE) and the Federal Reserve (Fed). However, Slok’s recent research, shared in a widely-read investor note, raises doubts about whether this rally can continue or if the current highs are, in fact, unsustainable. In this article, we delve deeply into the arguments, market context, and potential implications for traders and investors based on the insights provided by Torsten Slok and related market developments.
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### The Recent Performance of the Pound
The pound’s performance against the US dollar has been a defining feature of FX markets since mid-2023. GBP rallied strongly, especially in the early months of 2024, benefiting from:
– Market speculation that the Bank of England would delay rate cuts longer than the Federal Reserve.
– A robust UK labor market with sticky wage and inflation data.
– Broad-based US dollar softness as Fed rate cut expectations gathered pace in late 2023 and early 2024.
By June 2024, GBP/USD had reached multi-month highs, climbing above 1.28 before retreating. According to data from PoundSterlingLive.com, this surge tempted many to forecast further GBP strength through the summer.
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### Torsten Slok’s Warning: A Peak in Pound to Dollar
Torsten Slok, Chief Economist at Apollo Global Management, has thrown a note of caution into the bullish consensus. His assessment is rooted in both short-term technical signals and fundamental macroeconomic trends:
> “It is too early to price in rate cuts from the Federal Reserve, and consequently, it is also too early to fade USD strength, especially given the relative economic and inflation momentum between the US and the UK,” writes Slok.
According to Slok, the case for further GBP/USD gains has weakened primarily because markets may have overpriced the potential for earlier Fed rate cuts and underestimated the resilience of the US economy.
#### Key reasons highlighted by Slok include:
– **Economic Divergence:** The US continues to outpace the UK in terms of growth, with recent data prints surprising to the upside.
– **Inflation Dynamics:** Core US inflation remains stickier than anticipated, reducing the likelihood of imminent Fed cuts.
– **Interest Rate Differentials:** The gap between US and UK policy rates is persistently wide, with market pricing now at risk of adjusting toward a more USD-supportive scenario.
– **Reduced Market Volatility:** With volatility subsiding, the allure of carry trades and yield differentials returns, favoring the dollar.
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### The Shift in Fed Rate Cut Expectations
A central pillar supporting pound strength has been the belief that the Federal Reserve would outpace the Bank of England when it comes to cutting rates. Expectations for as many as three or four Fed rate cuts in 2024 were priced in at the start of the year. However, data in the first half of the year has forced a re-think.
– US jobs numbers remain solid, and consumer activity is healthy.
– Inflation, while lower than its 2022 peak, is still not convincingly on a path back to the Fed’s 2% target.
– Policymakers, including Fed Chair Jerome Powell, have repeatedly signaled patience, emphasizing that strong growth allows them to keep policy restrictive for longer.
This divergence between expectation and reality has seen the US dollar recover losses against major currencies, including the
Read more on GBP/USD trading.