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Pound Sterling Forecast: 1.16 vs US Dollar in Next 12 Months says This Bank

October 25, 2023 - Written by Ben Hughes


The Pound to Dollar (GBP/USD) exchange rate posted 10-day highs close to 1.2290 in early Europe on Tuesday, but the constructive tone quickly turned ugly with a sharp reversal.

Disappointing UK data undermined the Pound, especially with wider concerns over the European outlook.

The US data reinforced expectations of US out-performance and there were fresh losses in US Treasuries with the 10-year yield back at 4.87% after earlier lows close to 4.80%.

In response, GBP/USD posted sharp losses to 1.2160 towards the European close.

The US PMI manufacturing index edged higher to a 6-month high of 50.0 for October from 49.8 previously and slightly above consensus forecasts of 49.5.

The services sector recorded a limited net improvement to a 3-month high of 50.9 from 50.1 and above expectations of 49.8.

Cost burdens rose at the slowest pace for three years, with firms moderating hikes in selling prices at the same time. The rate of charge inflation eased to the weakest since June 2020 and was slower than the long-run series average.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said: “Hopes of a soft landing for the US economy will be encouraged by the improved situation seen in October.

He added; “The survey’s selling price gauge is now close to its pre-pandemic long-run average and consistent with headline inflation dropping close to the Fed’s 2% target in the coming months, something which looks likely to be achieved without output falling into contraction.

He did add a caveat; “That said, the tensions in the Middle East pose downside risks to growth and upside risks to inflation, adding fresh uncertainty to the outlook.”

The UK PMI manufacturing index recovered to 45.2 from 44.3 the previous month and above consensus forecasts of 44.7, although the sector has still been in contraction territory below 50.0 since August 2022.

The services-sector index declined marginally to 49.2 from 49.3, in line with market expectations, although this was a 9-month low.

There was a sharp decline in manufacturing output prices, but service providers raised prices at a faster rate on the month as companies looked to restore margins.

The UK data overall suggested that the labour market was cooling.

RSM UK economist Thomas Pugh “Overall, the PMIs paint a picture of a subdued economy that is feeding through to lower employment growth and slowing inflation.”

He added; “If this weakness is reflected in the official data over the next few months, it would suggest that the Monetary Policy Committee’s job is largely done; and keeping interest rates at current levels will be sufficient to bring inflation back to the 2% target.”

Money markets priced in a 90% chance that rates will be held at 5.25% at the November meeting.

The UK CBI industrial orders index declined to –26 for October from –18 the previous month and below consensus forecasts of –16 and the worst reading since January 2021.

There was also a weaker reading for the quarterly business optimism reading.

CBI Deputy Chief Economist Anna Leach commented; "The warning lights are flashing red in our latest manufacturing survey, with business sentiment deteriorating, output volumes falling and manufacturers becoming more cautious over their employment and investment plans."

Scotiabank noted that the sharp GBP/USD decline in a warning sign; “Sterling peaked just below 1.2290 earlier and, like the EUR, spot losses from the intraday high have been quite significant from a short-term technical point of view. The 1 and 6-hour charts reflect bearish reversal signals which tilt near-term risks lower.”

According to Danske Bank; “we expect the conclusion of the Bank of England hiking cycle to weigh on GBP.”

The bank has a 12-month GBP/USD forecast of 1.16.
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