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Pound to Dollar: Twelve-Month Forecasts Raised to 1.30 at Goldman Sachs

December 18, 2023 - Written by David Woodsmith


Goldman Sachs has raised its 12-month Pound to Dollar (GBP/USD) exchange rate forecast to 1.30 from 1.25 previously.

Nordea, however, expects only marginal gains to 1.28 by June 2024.

GBP/USD strengthened to challenge 3-month highs at 1.2790 before a slide to 1.2700 later on Friday as the dollar staged a recovery.

Market attention will turn to the next UK inflation release due on December 20th.

The Bank of England held interest rates at 5.25% at the latest monetary policy meeting.

There was a 6-3 vote for the decision with Haskel, Mann and Greene again voting for a further vote hike to 5.50%.

The Monetary Policy Committee (MPC) continued to warn that inflation pressures are to the upside and still warned over the high level of wage settlements.

The bank also warned that it was too early to talk of lower interest rates.

According to ING; “Of the recent central bank meetings, the Bank of England (BoE) probably offered the most pushback against dovish expectations.”

Goldman Sachs noted; “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.”

The UK PMI manufacturing index retreated to 46.4 for December from 47.2 and below consensus forecasts of 47.2.

The services-sector index, however, strengthened to 52.7 from 50.9 previously which was above market expectations of 51.0 and the highest reading for six months.

The US inflation data was broadly in line with expectations.

The Federal Reserve held interest rates at 5.50% which met consensus forecasts.

There was, however, more dovish than expected rhetoric from the Fed and Chair Powell.

A crucial element was also a lowering of interest rate projections for 2024.

According to the latest update, the median projections amongst FOMC participants for the Fed funds at the end of 2024 was lowered to 4.6% from 5.4%.

ING commented; “In a somewhat surprising move, the Fed has acknowledged recent disinflation trends and poured gasoline on the fire of easing expectations for 2024. The news has understandably been greeted by global asset markets, where stagflationary bets are being replaced by reflationary ones. This is broadly dollar negative.”

The stronger risk tone helped underpin the Pound.

In comments on Friday, New York Fed President Williams stated that the Fed is at or near the right place for monetary policy.

He did, however, add that the Fed must be ready to hike again if needed.

Importantly, he added that it’s premature to be even thinking about the timing of rate cuts and that the rate-cut issue is not the main question before the Fed.

The comments were significant in dampening optimism.

Bipan Rai, North American head of FX strategy at CIBC Capital Markets commented; “It reinforces the fact that the Fed is still very much a data dependent bank and not really endorsing what the market’s pricing in to a degree.”

He added; “This is a story about the inordinate amount of leverage and skewed positioning in the market that needed to be rebalanced.”

MUFG expressed a note of caution; “The comments from Fed Chair Powell open up the possibility of the Fed beginning to cut rates from the first quarter of next year although the continued description of inflation as “elevated” and the need for a cautious approach could still mean the Fed waits a little longer.”

It added; “there are challenges that could provide headwinds for further US dollar weakness in the first half of next year.”

According to Rabobank; “The combination of Fed Chair Powell’s dovish tone yesterday and the hawkish statement from the BoE today has sent cable back towards its late November high, though there were few surprises from the MPC. The deviation in the messaging from the two central banks can be easily explained by the far stickier nature of inflation pressures in the UK.”

It added; “That said, the UK economic outlook is also notably weaker than that of the US, meaning that the MPC is in a much more uncomfortable position than the FOMC.”

Socgen expects the European economy will be a barrier to Pound gains; “Put simply, the divergence in consensus forecasts of Eurozone, US and UK GDP growth for 2024 is going to slow and limit the Dollar’s fall unless the trends change.”

According to Nordea; “We believe this softer USD trend will become more apparent going forward, and this will help raise GBP/USD. That said, we do not expect economic growth in the UK for the next few quarters to be as resilient as in the US, and as a result, sluggish growth in the UK is likely to be a drag on GBP.”
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