November 21, 2023 - Written by David Woodsmith
STORY LINK Pound to Dollar Weekly Exchange Rate Forecast: "Can push up to 1.2590" say ING
GBP/USD Exchange Rate Looking for UK Tax Cuts to Break Tough Resistance around 1.2500
Chancellor Hunt will present the Autumn Statement on Wednesday with markets focussed on whether tax cuts can help the Pound to Dollar (GBP/USD) exchange rate break above 1.2500.
GBP/USD hit highs at 1.2510 on Monday before a retreat to 1.2470.
ING discusses the scope for tax cuts and estimates that there could be scope for £16bn in cuts given the better-than-expected fiscal trajectory.
It expects limited impact on monetary policy; “Our UK economist does not, however, think this moves the needle for the Bank of England rate story, where we think rates have peaked and the BoE will start easing next August.”
There is still scope for a positive Pound impact; “Speculation over tax cuts in a risk-positive environment should be good news for sterling. GBP/USD can push up to 1.2590.”
MUFG added; “it is possible that falling inflation and a better fiscal position will open up scope for more voter-pleasing tax cuts.”
The bank points out that fiscal credibility is vital and there will inevitably be frequent references to the disastrous mini budget in September 2022 when gilts and Sterling plunged.
MUFG considers that Chancellor Hunt and PM Sunak do have some credibility with the markets and, assuming any tax giveaway is not significantly larger than expected, the Gilt market reaction should be contained.
It expects only fleeting Pound gains; “Assuming Chancellor Hunt gets the balance correct, we could see some modest GBP out-performance in the immediate aftermath. However, we doubt it will alter the outlook enough to have any meaningful implications for our more bearish GBP outlook.”
On the dollar side of the equation, Goldman Sachs sees limited scope for further selling.
It notes; “For FX in particular, we still think it will be hard to erode much more of the Dollar’s appeal at this stage.”
Firstly, the bank notes that inflation is still at or above target, limiting any scope for the Federal Reserve to adopt a more dovish stance.
It also notes that the GDP tracking data has gone up rather than down following the latest batch of data.
Goldman also expresses concerns over the outlook for currencies challenging the dollar with US growth on-trend in 2024 while China and Europe will recover only slowly.
In this context, it adds; “That baseline is most consistent with relatively constrained FX volatility and only a gradual, bumpy decline in the US Dollar.”
Dane Cekov, senior FX strategist at Nordea notes that lower yields have undermined the dollar, but added; "From a technical perspective, the dollar now looks oversold against the euro, usually you'll see some sort of consolidation."
Cekov summarised; “For the USD to continue to decline in the short-term, US data needs to come in even weaker so that markets price in even faster rate cuts. Never say never, but this a tough case to see.”
During Thanksgiving week, SocGen does not expect the US soft-landing expectations to be disrupted.
There are still barriers to European currency gains and it noted; “European PMI data on Friday could be a reminder that growth on this side of the Atlantic isn’t anything to write home about.”
It adds; “Maybe it all adds up to the EUR/USD and GBP/USD bounces running out of steam at some point.”
According to the latest COT data released by the CFTC, the number of short Sterling positions increased to 27,700 contracts from 16,300 the previous week.
This was the largest short Sterling position since January 2023.
Asset managers maintained a notably negative stance towards the currency, but the extent of short positioning will maintain the scope for short covering, especially if there is a squeeze in spot markets.
According to UoB; “From here, GBP has to break and stay above 1.2505 before an advance to 1.2580 can be expected. The likelihood of GBP breaking clearly above 1.2505 will remain intact as long as it stays above 1.2385.”
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TAGS: Currency Predictions Pound Dollar Forecasts