Pound to Dollar Rate Higher: Fed and BoE Higher for Longer Narrative Dominates Markets

December 11, 2023 - Written by Frank Davies

STORY LINK Pound to Dollar Rate Higher: Fed and BoE Higher for Longer Narrative Dominates Markets

The Pound to Dollar exchange rate hit highs at 1.2590 on Monday, before settling around 1.2570.

Pound sentiment has improved, but the scope for gains is likely to be limited while the Federal Reserve maintains a determination to push back against market expectations of rate cuts.

Goldman Sachs now has a 3 and 6-month GBP/USD forecasts of 1.25 and 1.30 respectively from 1.18 and 1.25 previously.

There are important UK and US data releases this week as well as Federal Reserve and Bank of England (BoE) policy decisions.

Markets overall are very confident that there will be no change in interest rates with both central banks pushing back against expectations of a quick move to cut rates.

There has been a significant shift in market positioning with the latest COT data recording the first long Sterling position since late September.

Credit Agricole noted; “Our FX flow data points at banks inflows, as well as corporates, hedge funds and real money investors outflows.

Goldman Sachs is now more positive on the Pound; “a quicker move to rate cuts elsewhere will make the Bank of England less of a dovish outlier. If the BoE sticks with its ‘tabletop’ approach even if its peers are moving to earlier cuts, this should support Sterling.

On Tuesday, the UK will release the latest labour-market data while the US will release the latest consumer prices report.

Wages growth will be a key element for the BoE. According to HSBC “we expect further declines in the headline rates, but with part of this likely driven by base effects.”

As far as the rate decision is concerned, HSBC commented; “We expect an unchanged 6-3 vote for keeping Bank Rate on hold at 5.25%, with the three hawks who voted for a hike in November doing so again.”

ING added; “the UK has much more improvement to make on inflation, so we expect the BoE to reiterate a higher for longer message on Thursday in hopes of taming rate cut bets.”

Barclays takes a similar view; “The BoE will likely stay on hold and maintain its hawkish rhetoric, pushing back against "premature" Bank Rate cuts.”

The US data has backed hopes for a controlled landing and a further easing of inflation pressures.

According to BNPP; “the labor market continues to moderate gradually – consistent with our broader forecast of cooling growth and inflation.”

Nevertheless, the Fed is likely to remain opposed to any talk of rate cuts

BNPP added; “The gradual moderation in the labor data challenges the notion of the Fed pulling rate cuts into Q1 2024, in our view, unless the inflation data continue to run extremely cool. This is not our forecast.”

According to Credit Agricole guidance will be crucial; “While the Fed will likely leave the option of further tightening on the table in order to maintain optionality, we do not expect much pushback on the idea that the Fed has reached its terminal rate.”

Goldman Sachs considers that markets have moved too far; “This, combined with our more optimistic view on the US growth outlook leads us to retain our “stronger for longer” Dollar view as we think the market has done a bit too much adjustment.”

ING also expects the Fed to hold firm; “we expect a hawkish hold by the Fed on Wednesday, with the emphasis on rate cut pushback.”

Given markets are fully pricing in a May rate cut it added; “There is still ample room for some hawkish repricing this week, and we think the dollar can find additional support.”

According to Scotiabank; “GBP gains rather reflect the developing view among investors that “high for longer” is more relevant for the BoE policy outlook as the central bank battles inflation.”

It noted obstacles to further gains with a close above 1.2550 the first minimum requirement with resistance at 1.2620.”

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TAGS: Pound Dollar Forecasts