Pound to Dollar Forecast: "Push Above 1.2225 Resistance Needed to lift GBP" say Scotiabank

October 18, 2023 - Written by John Cameron

STORY LINK Pound to Dollar Forecast: "Push Above 1.2225 Resistance Needed to lift GBP" say Scotiabank

Geo-Political Fears Undermine the Pound Exchange Rates

The latest UK inflation data maintained an important element of uncertainty surrounding Bank of England policies.

With no decisive UK lead, Sterling markets overall have been focussed on Middle East fears and safe-haven dollar demand.

The Pound to Dollar (GBP/USD) exchange rate failed to hold above 1.2200 and retreated to 1.2170 as equities came under pressure.

The headline UK inflation rate unchanged at 6.7% and slightly above consensus forecasts of 6.6%.

The core inflation rate edged lower to 6.1% from 6.2%, but slightly above expectations of 6.0%.

The goods inflation rate fell slightly from 6.3% to 6.2%, while the services rate edged higher to 6.9% from 6.8%.

There will be further uncertainty surrounding the Bank of England reaction.

According to Emma Mogford, fund manager at Premier Miton; “policymakers will wait to see more of the lagged effect of its current policy, rather than increase rates, but the decision hangs in the balance”.

RBC Capital Markets had noted previously; “Since the MPC’s decision to hold rates in September we have argued that it would take a significant upside surprise in the data for them to restart their hiking cycle.”

It is more confident that rates will not increase further and added; Today’s data doesn’t represent that ‘significant upside surprise’ to our minds. Indeed we’d argue that compared with the MPC’s expectations it doesn’t really represent a ‘surprise’. We continue to see the MPC holding Bank Rate from here.”

Stephen Payne, portfolio manager at Janus Henderson Investors put the data in perspective; “it is still below the Bank of England’s forecast and so unlikely to push the MPC into a hike at their next meeting.”

Morningstar senior equity strategist Michael Field remains concerned over underlying inflation pressures. According to Field; “the danger is that getting core inflation down from here to anywhere near 2% may take years, not just months.”

He added; “Why is this a problem? Well, it poses a dilemma to the Bank of England, stubbornly high inflation means that they will likely keep interest rates high. Running high interest rates with a weak economy is a tight-rope act, one wrong move and we are in a potentially damaging recession.”

Dollar trends will also be important and investment banks expressed some surprise that strong data and higher bond yields on Tuesday failed to lift the dollar.

According to MUFG; “There is nothing specific or obvious to explain this lack of follow-through for the dollar.”

The bank did note that deadlock in the House of Representatives and the failure to elect a speaker may have undermined sentiment.

It added; “Whatever the reasons for the failure of the dollar to strengthen, it could well encourage further dollar selling as momentum traders liquidate long positions.

Gold posted strong gains on Wednesday and Middle East fears are liable to support the dollar.

From a medium-term perspective, Commerzbank FX Analyst Antje Praefcke noted that most investment banks expect the US economy to slide into recession while markets and the Federal Reserve are optimistic over a soft landing.

She considers that positive US data will increase confidence in a soft landing for the US economy and potentially support the dollar, but much of this is priced in, limiting the scope for further dollar buying.

She added; “at some point, the million-dollar question will then be: who is right, the market and the Fed or the majority of analysts? That will also be decisive for the fate of the USD. However, we are only likely to find out in a few months’ time.”

Commerzbank forecasts that GBP/USD will trade at 1.20 at the end of 2023.

According to Scotiabank the Pound has stalled; “Cable gains through the 1.22 mark are not finding any follow through support. A clear push above 1.2225 resistance is needed to lift the Pound.”

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TAGS: Pound Dollar Forecasts