November 7, 2023 - Written by Tim Boyer
STORY LINK Pound to Dollar Outlook: "Corrective GBP Losses May Extend to Low/mid-1.22s" say Scotiabank
The Pound to Dollar (GBP/USD) exchange rate posted notable losses on Monday and a recovery attempt failed on Tuesday with a retreat to just below the 1.2300 level.
On a longer-term view with a vulnerable UK economy, Nordea expects that GBP/USD will be held to 1.24 at the end of 2025.
Dollar moves will tend to dominate in the short term.
Commerzbank expects Fed rhetoric will be a key element; “Inflation data from the US is due next week. Until then things look rather quiet on the data front. That is why focus will probably be on comments by other Fed members. To what extent will other members share Kashkari’s views and how many members will echo the recently more dovish comments by Fed Chair Jay Powell?”
Given the net risks, the bank expects that there will be a reluctance to sell the dollar; “Principally the market could increasingly come to the conclusion that it should wait for further data publications and that the upside risks for inflation are still quite high at present. That is likely to limit the downside potential in USD for now.”
There have been no major UK data points so far this week and the calendar remains light until Friday’s GDP data.
In comments on Monday, BoE Chief Economist Huw Pill yesterday said that expectations for rate cuts from next summer looked reasonable.
According to Pill, pricing in financial markets - that currently points to a first rate cut to Bank Rate in August 2024 - "doesn't seem totally unreasonable, at least to me."
Pill insisted that the inflation battle needed to continue, although he did add; “But if we have the restrictive policy for too long, then the danger is we trigger a recession, we trigger an excessive slowdown in the economy."
According to ING; “We think these comments are a mild sterling negative and given the risk that Fed-speak puts equities on the back foot again, risk-sensitive sterling could hand back some of its recent gains.”
In this context, ING sees scope for GBP/USD to weaken to 1.2250.
Scotiabank takes a similar view; “Corrective GBP losses may extend to the low/mid-1.22s in the near term.
US Treasuries have rallied on Tuesday with the 10-year yield back below 4.60% which should offer a significant element of near-term Pound protection.
HSBC maintains a positive outlook for the US currency during the next 12 months; “The USD should continue to capitalise on the US growth resilience, when compared to continued growth disappointments outside the US. As the full impact of earlier rate hikes becomes evident, the prospect of slower global economic growth into 2024 should also support the USD. In addition, heightened geopolitical risk should continue to favour the ‘safe-haven’ USD.”
From a longer-term perspective, Nordea expects that overall yields will remain supportive for the dollar. It adds; “With the Fed still unsure if they have tightened enough, a lot of things needs to go wrong before they are sure policy needs to be loosened. We believe this will take at least all of next year.”
Nordea expects that the prolonged period of high interest rates will support the dollar and the Pound will tend to be vulnerable if risk appetite remains fragile.
It forecasts EUR/GBP at 0.93 at the end of 2025.
Paul Mackel, global head of forex Research at HSBC, maintains a downbeat outlook on the UK economy; "Come Friday, there is a raft of UK activity indicators released, which should paint a familiar message. UK growth is anaemic, and GBP does not warrant being in a stronger position."
Unicredit expects Pound resilience on yield grounds; "Markets expect the BoE to lower rates in 2024, but starting a bit later than the Fed and probably acting with less intensity."
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TAGS: Pound Dollar Forecasts