Pound to Dollar Rate Forecast Towards 1.20 say HSBC Analysts

January 2, 2024 - Written by Ben Hughes

STORY LINK Pound to Dollar Rate Forecast Towards 1.20 say HSBC Analysts

The Pound to Dollar (GBP/USD) exchange rate peaked at 4-month highs around 1.2830 on December 28th before a significant retreat to 1.2715 on Tuesday as the dollar regained some ground.

Seasonal factors will be potentially significant with the dollar tending to weaken ahead of the year end and then regaining ground in January.

UK data will remain under scrutiny. According to the final data, the UK PMI manufacturing index was revised down slightly to 46.2 from the flash reading of 46.4 and compared with the 7-month high of 47.2 the previous month.

All components were in contraction territory for the month and overall business optimism declined to a 12-month low.

Rob Dobson, Director at S&P Global Market Intelligence, commented; “UK manufacturing output contracted at an increased rate at the end of 2023. The demand backdrop also remains frosty, with new orders sinking further as conditions remain tough in both the domestic market and in key export markets, notably the EU.”

He added; "With concerns about high interest rates and the cost-of-living crisis hurting demand, the outlook for manufacturers in the months ahead remains decidedly gloomy.”

The Pound had gained some support from expectations that the Federal Reserve and ECB will cut interest rates more aggressively than the Bank of England.

These expectations were, however, jolted by the latest UK inflation and GDP data reported in December.

Jane Foley, head of currency strategy at Rabobank, commented that the perception that the BoE would lag European Central Bank and Federal Reserve policy easing had been “thrown into disarray" by the latest economic data.

She added; "The upside for cable has started to look a little more complex. Without higher inflation or stronger growth we could see it top out below $1.30. Until the data, I was more confident we'd hit $1.30."

HSBC's head of European currency research Dominic Bunning examined the impact of overall yield trends.

According to Bunning, the GBP/USD rally from $1.20 in October to $1.27 in late November was "completely unjustified" from the perspective of interest rate differentials.

The Pound is also influenced strongly by global risk conditions with net support when sentiment is strong. Equities have made strong headway on hopes for US and European interest rate cuts in 2024.

According to Bunning; "Obviously, if you compare it to equity markets then it looks a lot more sensible.”

He added; "That's the battle that's playing out. At the moment the equity driver is winning but we are sceptical as to whether that can persist."

He expects that the Pound will lose ground as the focus shifts back towards overall yield spreads with GBP/USD sliding towards 1.20.

Dollar trends and US economic data will inevitably be important for the Pound in the near term with an impact on yields and risk appetite.

According to MUFG; “The recent dovish repricing of Fed rate hike expectations sets a higher bar for further US dollar weakness at the start of this year. Market participants will now require the release of weak US economic data regarding both activity and inflation to support expectations for the Fed to begin cutting rates as soon as in March.”

It added; “Those expectations will be tested in the week ahead by the release tomorrow of the latest FOMC minutes from 13th December meeting and the latest nonfarm payrolls report for December on Friday.”

Fiscal policy will also be monitored closely with the budget due in just over two months' time.

There will be reservations that the government will be tempted to engage in a more substantial relaxation of fiscal policy in an attempt to secure an improvement in opinion poll ratings.

Michael Metcalfe, State Street Global Markets' head of macro strategy, considers that Prime Minister Sunak and Chancellor Hunt will not engage in reckless easing.

He added; "Heading into an election year, that will mean promises of fiscal largesse will be moderate and funded."

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TAGS: Pound Dollar Forecasts