December 3, 2023 - Written by James Fuller
STORY LINK Pound to Dollar Forecast: 1.31 by 2025 say BofA
Bank of America expects that the Pound to Dollar (GBP/USD) exchange rate will strengthen to 1.31 at the end of 2024.
Goldman Sachs, however, expects that GBP/USD will weaken to 1.18 early next year and trade slightly below current levels at 1.25 in 12 months.
Markets are now pricing in more aggressive Fed rate cuts during 2024 while Bank of England (BoE) projections have been scaled back during the week.
GBP/USD posted 3-month highs just above 1.2730 and recovered from a slide to 1.2600 to trade around 1.2685 on Friday.
The BoE has maintained a hawkish stance in comments this week.
According to Deputy Governor Ramsden; “We think that monetary policy is likely to need to be restrictive for an extended period of time," he said. "And we've communicated that it will need to be sufficiently restrictive for sufficiently long to get inflation back to the 2% target.”
He ruled out the potential for any near-term cut in interest rates.
There were similar hawkish comments from Governor Bailey and MPC member Greene.
Nationwide reported that house prices increased in November and the Lloyds Bank business survey points to stronger expectations of price increases.
MUFG commented; “The BoE are likely to remain much more concerned over domestically generated inflation than in either the US or the euro-zone.”
Westpac expects the shift in fiscal and monetary policy expectations will support the Pound in the short term; “The near-term impacts of the Autumn Statement should support growth, though the likely higher tax take in coming years will see this being eroded.”
Ahead of the December 14th meeting, it added; “Rather than focusing upon hurdles to further gains in GBP/USD, the profile is likely to be supported on dips into that meeting with relatively second tier data releases over the coming week.”
According to Bank of America; “The weak structural backdrop is by now well known but the key for us how the Bank of England will be able to push back on current market pricing for rates cuts next year.”
It adds; “This may provide some support for GBP but we continue to emphasise that high for longer UK rates is likely to exacerbate the downside risks to an already weak economy. In this context, higher for longer UK rates is for bad reasons, not good ones.”
Goldman Sachs does not consider real rates will be attractive enough; “That, combined with the central bank’s apparent reluctance to hike rates, suggests that Cable should remain under pressure.”
Fed commentary was the main focus during the week as Governor Waller engaged in a notable shift in rhetoric as he appeared to drop his previous comments that further interest rate hikes might be needed.
Fed Chair Powell stated that interest rates would be increased again if needed to lower inflation and it’s premature to say that policy is restrictive enough.
Powell, however, stated that the Fed is not in a rush as it is getting what it wanted to get. He also stated that there is a path to 2% inflation without large job losses and the central bank is on that path.
Markets, however, were pricing in over a 50% chance that interest rates would be cut by March with an 85% chance of a cut by May.
The shift in Fed pricing undermined the dollar with a sharp drop in US yields.
The 2-year yield, for example, dipped to just below 4.60% and the lowest level for over five months.
Wells Fargo forecasts a dollar peak in the first quarter of 2024, but gains are liable to be more modest and short-lived than previously anticipated.
The bank considers that BoE resistance to rate cuts could underpin the Pound.
Bank of America expects lower US rates will be crucial; “Our economists expect three Fed cuts next year, starting in June, assuming inflation in the meantime continues to fall. The bottom line is a soft landing in the US that allows the Fed to cut rates and helps bring the USD down from a still overvalued level.”
MUFG noted that this week’s Beige Book revealed a sharp drop in demand conditions to a 12-month low and confidence within housing and the labour market also deteriorated.
This would risk putting downward pressure on short-term rates.
It added; “if we are about to see a clearer deterioration in labour market conditions that would help fuel a further bull steepening of the 2s10s US Treasury curve that tends to coincide with dollar depreciation.”
SocGen noted; “Seasonals are bearish USD in December against a range of currencies.”
Credit Agricole is more cautious over the potential for further losses; “a lot of negatives seem to be in the price of the USD, and this should mute any downside risks for the currency in the near term.”
ING added; “We expect some dollar consolidation in the coming days, with still upside risks as the greenback reconnects with its rate advantage."
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TAGS: Pound Dollar Forecasts