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Pound to Dollar Outlook: 1.22 by End-2024 say Nordea

November 12, 2023 - Written by Frank Davies

Nordea foreign currency analysts predict that the Pound to Dollar exchange rate (GBP/USD) will make no headway and trade at 1.22 at the end of 2024.

Bank of America expects the Pound will struggle in the short term, but expects a dollar retreat in 2024 will help trigger a GBP/USD rebound to 1.35 at the end of next year.

After strong gains over the second half of last week, the Pound to Dollar (GBP/USD) exchange rate has been under sustained pressure.

US Federal Reserve Chair Powell stated that the central bank is not confident that it has achieved a sufficiently restrictive stance.

He added that the Fed is attentive to the risks that stronger growth could undermine inflation progress which could warrant a monetary policy response.

The comments overall were relatively hawkish and he added; "If it becomes appropriate to tighten policy further, we will not hesitate to do so."

Global equity markets came under pressure following Powell’s comments.

Tina Teng, market analyst at CMC Markets commented; “Powell's speech was quite hawkish, and that just really hit sentiment."

Bond yields were again a key element with higher US yields following Powell’s comments also undermining the UK currency.

Bond yields also spiked higher after the latest Treasury 30-year bond auction.

Looking at Treasuries, Steven Ricchiuto, U.S. chief economist at Mizuho Securities commented; "The market was oversold before non-farm payrolls and the FOMC meeting (last week) and it was overbought before the auction."

He added; "Basically, investors looked at where the pricing was and said I'm not as interested."

Bank of America (BoA) considers that the Pound is now being driven by familiar fundamentals; “The removal of UK-specific risk premium has consequently seen GBP re-establish itself to some of its traditional anchors. Global risk sensitivity is once again a key driver for GBP.”

BoA considers that ther are important UK structural issues for the UK economy with embedded inflation forcing the Bank of England (BoE) to keep high interest rates.

Although pricing out rate cuts may provide initial GBP support it adds; “the GBP correction has come against the backdrop of an increasingly challenging structural macro outlook, which we think will be the limiting factor for sterling rallies in 2024.”

BoA still sees scope for Pound rallies next year, but with the currency held in the lower post-Brexit range.

The latest UK consumer prices inflation data will be released on Wednesday.

Last October, there was a jump in energy prices which will come out of the calculation this year and push the headline rate down.

There was also a decline in energy prices this October.

Given this combination, consensus forecasts are for the annual rate to slide to below 5.0%.

The core inflation data will be watched very closely within the data with expectations of a decline to 5.7% from 6.1%.

The UK will also release the latest labour-market data with the main emphasis on wages.

Westpac notes the importance of inflation data; “The latest report this week showed that 3-month inflation expectations has continued to decline. This will heighten focus on next week’s inflation report after a stuttering in their slide last month.”

It adds that the overall suite of data will be important; “Labour data may be suspect at present, but wage data and retail sales are also key inputs for market expectations of BoE actions as well as the potential for the economy avoiding recession.”

Goldman Sachs expects dollar strength will be sustained in the short term, especially with a lack of attractive alternatives.

According to the bank; “We have been arguing that the Dollar’s high valuation is supported by capital inflows seeking better returns in the US, and a structurally negative Dollar outlook would require better return prospects in the “Challengers.”

It added; “The recent supply-side divergence cuts in the other direction, and that should continue to make the Dollar a high bar to beat for long-term capital allocation.”

Westpac expects dollar trends will dominate the Pound moves; “USD drivers remain key in determining whether GBP rebounds can be sustained and avoid another threat of breaching the pivotal 1.2050 level. Interim support at 1.2200-25 is now of note and GBP needs to close above 1.2425 to suggest a genuine turn.”

Scotiabank sees scope for further GBP/USD losses; “Short-term trends look soft and losses over the week suggest the soft tone may extend. The 1.22 point may be a short-term pivot, with weakness below here pointing to the risk of losses extending to retest the 1.20/1.21 area.
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