Pound to Dollar Exchange Rate: 1.32 in Twelve Months

December 20, 2023 - Written by Frank Davies

STORY LINK Pound to Dollar Exchange Rate: 1.32 in Twelve Months

The Pound Sterling (GBP) posted significant gains against the US Dollar (USD) during Tuesday, while the overall trading performance has been more mixed.

Wednesday’s inflation data will be an important indicator of underlying sentiment.

There have been no major data releases, but Bank of England rhetoric has remained hawkish and markets expect the BoE rate cuts will lag other major central banks.

In this context, overall expected yield spreads have underpinned the Pound.

Volatility levels have remained subdued in global markets which has also encouraged carry trades and supported the Pound, especially with equity markets posting significant gains.

According to ING; “FX markets may stay quiet, and the general mood on the dollar could be modestly bearish unless we hear some more convincing pushback on rate cuts by Fed officials.”

The Pound to Dollar (GBP/USD) exchange rate advanced to highs close to 1.12760 before settling around 1.2750.

GBP/JPY jumped to 184.15 from 180.50 after the Bank of Japan policy decision before a retreat to around 183.20.

The performance against the Euro has been less impressive with the Pound to Euro (GBP/EUR) exchange rate strengthening to 1.1630 before a retreat to around 1.1600 and compared with December lows below 1.1570 posted on Monday.

The Pound has also lost ground against the Australian and New Zealand dollars.

Monetary policy will be a key focus.

In a speech on Tuesday, Bank of England Deputy Governor Breedon, who was appointed to the Monetary Policy Committee in November, commented; "Given what we know now, I can say that it will be important for monetary policy to be restrictive for an extended period in order to return inflation sustainably to the 2% target in the medium term."

She outlined two alternative forecasts for inflation with high inflation leading to interest rates at 7.0% while a lower inflation scenario would allow rate cuts during 2024.

She declined to make a forecast on the likely outcome, but warned that the high inflation outcome would be more damaging and the bank needed to lean against this potential scenario.

According to Rabobank FX Strategist Jane Foley; "The prevailing view that Bank of England rate cuts will be lagging those of the Fed in 2024 has supported the pound.”

Money markets are currently pricing in around 120 basis points of cuts from the BoE next year but almost 150 basis points from the Fed.

Foley added; "We see scope for cable to track up to $1.30 on a nine-to-12 month view on rate differentials.”

The latest UK consumer prices inflation data will be released at Wednesday’s European open.

Consensus forecasts are for the headline rate to decline further to 4.4% from 4.6% and this would be the lowest rate since November 2021.

The core rate is forecast to decline to 5.5% from 5.7% and this would be the lowest reading since March 2022.

A higher than expected rate would reinforce expectations that the BoE will push back against market rate-cut expectations.

A lower rate would increase speculation of a BoE pivot, although sentiment towards the UK economy could improve.

According to Wells Fargo; “We doubt the November CPI will show enough progress on the inflation front to significantly alter the Bank of England policy outlook.”

According to HSBC; “The BoE sees the balances of risks as skewed to the upside for inflation. This may keep the short term balance of risks similarly skewed for GBP.

HSBC, however, is doubtful that the BoE can maintain its hawkish stance for an extended period.

It added; “While we acknowledge the BoE’s current bias clearly remains more hawkish than many others, we are somewhat sceptical as to how long this can persist.”

BNP Paribas sees scope for Pound gains, but also expects that weak fundamentals will cap gains; “We anticipate that with a slowing economy, the UK will eventually enter a period of stagflation, where low growth will ultimately catalyse a greater fall in price pressures.”

It has a 12-month GBP/USD forecast of 1.32.

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TAGS: Pound Dollar Forecasts