Pound to Dollar Forecast: 1.22 in 12 months say Commerzbank

October 15, 2023 - Written by Ben Hughes

STORY LINK Pound to Dollar Forecast: 1.22 in 12 months say Commerzbank

Currency strategists at ING forecast that the Pound to Dollar exchange rate will strengthen to 1.28 on a 12-month view, primarily under the influence of a weaker dollar.

The bank, however, has dropped its previous forecast of a move above 1.30 while Commerzbank expects GBP/USD will make no real progress and forecasts a rate of 1.22 in 12 months.

Here are the latest institutional forecasts (ING, Commerzbank, CIBC, Monex, MUFG, Westpac) and the GBP/USD news for the week.

Global economic and market conditions tended to dominate the Pound during the week, especially with important geo-political considerations. Sharp moves in energy and commodity prices also contributed to Sterling volatility with big swings in equity markets and precious metals.

GBP/USD posted 3-week highs at 1.2330 as US yields retreated before a slide to below 1.2150 on Friday amid risk aversion.

UK data releases failed to provide Sterling support with a lacklustre GDP report and further evidence of housing-sector weakness

Bank of England (BoE) policies will remain a key underlying focus.

BoE Chief economist Pill commented on the outlook during the week.

According to Pill; "Whether we've done enough - or whether we have more to do - I think is becoming a more finely balanced issue. But we will do what we need to do in order to have inflation at 2% on a lasting basis,"

BoE MPC member Dhingra continued to warn over the impact of higher interest rates. According to Dhingra; "The economy's already flatlined. And we think only about 20% or 25% of the impact of the interest rate hikes have been fed through to the economy.”

She maintained a downbeat outlook on the economic outlook; "When you're growing as slowly as we're growing now, the chances of recession or not recession are going to be pretty equally balanced. So we should be prepared for that. It's not going to be great times ahead."

Nick Rees, FX market analyst at Monex Europe commented; "In the absence of a growth pickup, further rate hikes look unnecessary, but with a sharp recession also appearing unlikely at this point, nor is there a need to pull forward the timing of any rate cuts."

According to ING; “Barring some big upside surprises to the inflation and wage data published on October 17/18th, we think policy will be left unchanged at the Nov 2nd meeting and the cycle will be over.”

The headline US inflation rate held at 3.7% in September compared with consensus forecasts of a retreat to 3.6% while the core rate declined to 4.1% from 4.3% and in line with market expectations.

There were mixed interpretations of the data, but the dollar secured net gains.

Federal Reserve speakers suggested that there was scope for patience which suggested no rate hike in November, but members still warned over the need to hold rates higher for longer.

According to CIBC; “The underlying detail in today's [CPI] report suggest that demand-side price pressures are heating up and will likely require more restrictive monetary policy. As a result, we expect the Federal Reserve to raise rates in December, allowing some time for more data and to judge the durability of the tightening in the bond market.

The Pound will inevitably struggle if the Fed narrative continues to focus on the possibility of higher rates.

Longer-term US fundamentals will also be significant, especially with on-going political tensions.

House Republican Scalise dropped out of contention to be House Speaker with further stalemate in Congress.

There will be further risks of a government shutdown.

MUFG commented on longer-term trends; “supply is going to remain an issue for the US Treasury market given the unprecedented fiscal outlook facing the US going forward.”

It added; “What is happening right now with the fiscal deficit is alarming.”

The bank noted that the US fiscal deficit has jumped 60% in the first 11 months of 2022/23 to 1.52trn.

According to MUFG; “There has never been such a surge in the deficit in a year in which the economy has been expanding by over 2.0%.”

MUFG added; “This is unsustainable and only reinforces the risks of higher yields in the US creating increasingly unfavourable financial market conditions which will prove US dollar supportive.

Over the longer term, the fiscal position will tend to undermine the dollar.

In contrast, Westpac is more positive over the UK fiscal-policy outlook despite elevated deficits.

According to Westpac; “The takeaway for markets is that the year-long run into the election is likely to be about prudent economic alternatives rather than fractious ideology. That should stabilise views on UK and provide a base under GBP.”

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TAGS: Pound Dollar Forecasts