The pound could strengthen against the US dollar in June, according to research from French banking giant Société Générale.

It has been noticed that in eight of the last ten years, the pound has risen against the greenback, as June appears to be a poor month for the US dollar.

As strategist Kenneth Broux at Société Générale noted: "Seasonals traditionally turn negative USD in June, but this recurring trend could be tested if investors rushed too quickly to conclude that the Fed will be less aggressive in raising rates this year."  At the same time, the US dollar has weakened following disappointing macroeconomic data and diminishing expectations for further interest rate hikes by the Fed.

Weak US dollar

The US dollar has recently fallen due to weak economic data and markets pricing less interest rate hikes by the Federal Reserve this year. This, combined with a broad-based decline in US Treasury yields and cautious comments by some Fed policymakers including Atlanta Fed President Raphael Bostic this week have raised the possibility that the dollar's gains could be limited. The market is cautious as the Fed could pause its tightening cycle in September. This sentiment has driven the dollar lower.

Sterling could rise

Sterling could strengthen from expectations of a June rate hike at the Bank of England, especially after the government’s $15bn boost to struggling households to ease the cost of living. The cash giveway could help increase economic activity and consumer confidence and boost inflation rates, forcing the Bank to consider raising rates.

The pound to US dollar exchange rate rallied after the release of the Fed’s minutes from the May policy meeting, which confirmed that policymakers could reconsider their interest rate position depending on the outlook of the economy. For example, if inflation rates fall significantly in the months ahead, then FOMC members would be “prepared to do less.”

The Fed and interest rate hikes

Chairman Powell and other members of the Fed have noted that they are prepared to lift interest rates more but also “to do less” if inflation rates begin to fall during the months ahead. According to their minutes, Federal Reserve officials stressed the need to raise interest rates quickly and more than markets anticipate to manage surging inflation. They also noted that policy may have to move past a “neutral” stance in which it is neither supportive nor restrictive of growth. As they stated in the minutes, “Most participants judged that 50 basis point increases in the target range would likely be appropriate at the next couple of meetings.” But the Federal Open Market Committee members clarified that “a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook.”

This is important for the pound. If the Federal Reserve’s hiking expectations are lowered further then the US dollar will come under more pressure, while the pound will rise.

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