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The Pound to Dollar: Forecasts see Possible Gains to 1.2745, say UoB

December 1, 2023 - Written by John Cameron


UK and Global Inflation Pressures in Focus, GBP/USD Exchange Rate Finds Support at 1.2600

European currencies have been generally on the back foot on Thursday as the dollar has secured a net recovery in global markets, but with some Pound resilience in evidence amid fears over sticky UK inflation.

The Pound to Dollar (GBP/USD) exchange rate dipped sharply to test solid support just above 1.2600 before a recovery to 1.2640 in choppy month-end trading.

There have been no major UK data releases, but there has been significant survey evidence.

According to the latest Bank of England Decision Maker’s Panel (DMP), businesses expect their output price inflation to decline over the next year. Year-ahead own-price inflation was expected to be 4.4% in the three months to November, down from 4.5% in the three months to October.

One-year ahead CPI inflation expectations also decreased to 4.4% in November, down from 4.6% in October.

As far as the labour-market is concerned, expected year-ahead wage growth remained unchanged at 5.1%.

The Lloyds Bank business barometer strengthened to 42 for November from 39 previously and the strongest reading since February 2022.

The survey also recorded that the net balance of companies planning to lift prices in the coming year reached a new high of 61% from 59% the previous month.

The DMP data will offer some comfort for the Bank of England, but the central bank will be uneasy over the overall survey evidence which suggests that inflation pressures remain stubborn.

According to Bank of England MPC member Greene, monetary policy may have to be restrictive for an extended period of time in order to return inflation to the 2% target.

She added that she was concerned that a soft landing might go wrong in the economy and, although it was better to do too much rather than too little, the risks on each side of the debate are more finely balanced.

As far as US inflation data is concerned, the PCE prices index increased 3.0% in the year to October from 3.4% previously.

The core index increased 0.2% on the month with the year-on-year increase declining to 3.5% from 3.7%.

This was in line with market expectations and the lowest reading since June 2021.

Treasuries, however, lost ground with the 10-year yield back above 4.30% which supported the dollar.

Mohamad Al-Saraf, associate, FX and rates strategy at Danske Bank commented; "The key drivers in November for the dollar weakness have been the benign inflation data and the loosening signs of the labour market. The notion of a soft landing has increased and usually that's a bad environment for the dollar."

Fed rhetoric will also continue to be watched closely.

ING sees a limit to more dovish rhetoric; “We are still doubtful the Fed will want to sit and watch as rates fall, given the lingering interest to keep financial conditions tight at the current juncture, so a more decisive pushback against rate cut bets remains a tangible risk for the FX market.”

Wells Fargo expects that the dollar can hold firm in early 2024 as the economy continues to perform well.

Nevertheless, it expects that the US currency will lose ground for next year as a whole.

It considers two divergent scenarios will undermine the US currency.

According to Wells Fargo; “A hard landing or US recession next year would see interest rate and growth trends swing against the US currency. A soft US landing, combined with inflation progress and lower US yields, could support broader financial market sentiment, which would also weigh on the ‘safe-haven’ support for the USD.”

It adds; “As the global monetary policy cycle turns to easing, broad US Dollar depreciation is looking increasing likely across a wide range of scenarios.”

According to UoB; “as long as 1.2600 is not breached (‘strong support’ level), there is room for it to advance to 1.2745 before the risk of a pullback increases. At this time, the chance of GBP rising to the next resistance at 1.2795 is not high.”
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