Pound to Dollar Outlook: 1.32 in Twelve Months say BNP Paribas

November 19, 2023 - Written by Frank Davies

STORY LINK Pound to Dollar Outlook: 1.32 in Twelve Months say BNP Paribas

BNP Paribas predicts the Pound to Dollar exchange rate could rise to 1.32 within a year, while Danske Bank sees it dropping to 1.17. US and UK inflation declines are leading to expectations of rate cuts from the Fed and BoE in 2024.

Despite weak UK retail sales, markets anticipate three BoE rate cuts next year.

The British Pound's potential gains are expected to be driven by a weaker dollar, with Westpac suggesting GBP/USD could reach 1.2600 if US data continues to disappoint.

GBP/USD Exchange Rate: Transatlantic Inflation Data Dominates

Foreign exchange analysts at BNP Paribas expect the Pound / Dollar exchange rate to strengthen to 1.32 over the next 12 months.

Danske Bank, however, expects renewed losses to 1.17.

GBP/USD briefly hit 2-month highs just above 1.2500 during the week as US yields dipped sharply, but was unable to hold the gains and settled around 1.2420.

Inflation developments have been a key element on both sides of the Atlantic during the week.

US consumer prices were unchanged on the month and the headline US inflation rate declined to 3.2% from 3.7% and slightly below consensus forecasts of 3.3%.

The core rate also edged lower to 4.0% from 4.1%.

The inflation data triggered fresh expectations of Fed rate cuts in 2024.

According to MUFG; “Furthermore, the recent sharp drop in the NAHB housing market index which is a measure of homebuilder confidence sends a clear signal that the sharp adjustment higher in mortgage rates since the summer is providing a significant headwind to growth in the more interest sensitive sectors of the US economy such as the housing market.”

ING expects substantial rate cuts in 2024; “Currently we forecast 150bp of Fed easing starting next May/June. This is premised on tighter financial conditions finally weighing enough on aggregate demand to see US growth converge on the stagnant trajectories, especially in Europe.”

Westpac sees scope for a further limited dollar retreat in the short term, but is still reluctant to forecast an extended bear market.

It adds; “Beyond that, we are wary about calls for a sustained medium term USD decline. The lingering impact of US Covid fiscal transfers and Biden-omics ($280bn CHIPS Act, $640bn Inflation Reduction Act and $1.2trn Infrastructure Investment and Jobs Act), point to a US growth story that continues to defy tight credit conditions.”

BNP expects the dollar will lose ground; “In the medium term, as rate differentials normalize and global growth recovers, a broad-based USD decline would be magnified by the fact that the currency is rich to fair value and global investors are overweight US assets.”

The headline UK inflation rate declined sharply to 4.6% from 6.7% previously and below consensus forecasts of 4.7%.

The core rate also declined to 5.7% from 6.1% and below expectations of 5.8%.

The sharp decline in headline inflation was driven primarily by retail energy prices, especially as the jump in prices for October 2022 came out of the annual calculation.

The data, however, was still important in driving increased market confidence that a further Bank of England rate hike was very unlikely and that the central bank would cut rates next year.

The latest retail sales data was weaker than expected with a further 0.3% decline in volumes for October after a revised 1.1% decline the previous month and the lowest reading since early 2021.

Although the wages data was still strong, the combination of lower inflation and weak retail sales data amplified expectations that the BoE would move to a looser policy.

Markets are now pricing in at three rate cuts in 2024.

Commerzbank considers it too early to talk about rate cuts; “After all, at 5.7%, core inflation is still a long way from the BoE's 2% target. Discussions about cutting interest rates simply don't really fit into the picture.”

According to Danske bank; “MPC members have tried to push back on the market pricing of rate cuts but to no avail.”

BNP is far from positive on the Pound and expects GBP/USD gains will be driven by dollar losses. On GBP It notes; “we think risks to the downside dominate in the medium term. We expect the UK economy to fall into recession in H1 2024 and political risk to rise ahead of the general election.”

It adds; “Given the UK’s reliance on foreign financing, these factors could result in a greater risk premium being priced in, which would warrant a further weakening of the GBP.”

According to Credit Agricole the outlook is slightly more positive; “growing real incomes in the UK economy (on the back of still solid nominal wage gains that are coupled with subsiding cost-push inflation) could help mitigate some of the downside risks to growth in coming quarters.”

Stronger risk conditions would be a positive backdrop for the Pound.

ING expects substantial UK rate cuts and added; “This probably means that GBP/USD will struggle to sustain any gains over 1.30.”

According to Westpac; “There’s potential for 1.2600 during the weeks ahead if the recent run of US data disappointments continues.”

Credit Agricole is still cautious over GBP/USD; “In all, we think that it would take positive economic data surprises in the coming days and weeks as well as more forceful pushback by the MPC against market expectations of significant rate cuts next year to see the GBP extending its more recent gains.”

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