February 11, 2024 - Written by David Woodsmith
STORY LINK Pound to Dollar Week Ahead Forecast: "Modest Gains for GBP/USD" say Natwest
NatWest analysts forecast that the Pound to Dollar exchange rate (GBP/USD) will strengthen to 1.30 at the end of 2024.
RBC Capital Markets has raised its forecasts, but still expects GBP/USD will retreat to 1.24 at the end of the year.
After a slide to 7-week lows near 1.2520 early in the week, GBP/USD recovered to 1.2635 at the end of the week as dollar moves tended to dominate.
The two BoE members who backed a rate hike at the February meeting continue to fret over inflation trends.
MPC member Mann maintained a hawkish stance on global and domestic risks.
Mann warned that British inflation was vulnerable to upside shocks, including from events in the Red Sea.
She added; "I worry that such an upward inflation shock coming on the heels of the recent high inflation environment will be more swiftly incorporated into firms' costs and prices, exacerbating upside momentum."
According to JP Morgan; “Given that our UK economists have been flagging upside risks to growth, the strong US jobs number reinforces our view that the first UK rate cuts will come in August.”
RBC noted; “Following the shift in the MPC’s rhetoric, our economists now expect the BoE to start cutting rates in August and lower the policy rate by a total of 100bps to 4.25% by the of 2024. This would still mean the BoE will start cutting rates later than the Fed and the ECB (RBC expects both to start in June). The BoE’s more gradual shift to rate cuts than peers removes a reason to sell GBP.”
Risk conditions will be important. According to HSBC; “The Fed’s emphasis on forward guidance has meant that a lot of good news is already priced into equities. There is also the complication of quantitative tightening and liquidity, which may turn less favorable heading into Q2 2024.
Tighter financial conditions would tend to undermine the Pound.
Standard Chartered commented on the US outlook; “Given the size of the NFP shock, we think it will take either a surprise of equal magnitude in the opposite direction or an accumulation of softer data to reverse the impact. For example, if core CPI inflation came in at 0.1% m/m on 13 February (not a forecast but in contrast to the current 0.3% m/m Bloomberg consensus), investors may decide that the Fed see enough progress on inflation to begin an easing cycle in May.”
It added; “Absent such a dovish signal, the USD positive scenario may persist until offsetting data accumulate. And there is still USD upside risk if incoming data reinforce the NFP signal.”
RBC commented on the US election; “Polls show the election is a coin toss and for all the investor focus on the event, we suspect even that may not be enough to break USD out. Eventually we look for USD to trade lower against the majors, but that is more a story of portfolio hedging flows.”
It added; “Although GBP may further benefit from decent carry in the near-term, we don’t yet see a catalyst to drive an outright GBP-bullish view on a longer-run horizon.”
According to NatWest; “The outlook is still one of modest gains for GBP/USD, primarily on our expectations that the Fed cuts far more aggressively than the BoE this year. The USD is also assessed to be richly valued from a long-term perspective.
It doubts there will be near-term headway; “It may initially be hard going hard going for Sterling has markets take a more cautious stance on the Fed. So picking the point of peak optimism over US economic optimism and peak global pessimism will define the path GBP/USD through the year.”
ING commented on the overall dynamics; “Doubts about the timing and speed of central banking easing cycles have contributed to lower levels of volatility and a search for yield. Step forward the dollar with one of the highest yields in the G10 FX space and the added benefit of liquidity – useful should geopolitical or US regional banking stress escalate.”
According to the bank; “We continue to expect this range-bound environment to give way to a broader dollar decline during the second quarter.”
Goldman Sachs maintains a positive stance on the dollar; “Stepping back, this is still the type of back and forth we expect to characterize FX markets this year. The pace of US activity will make it hard for the FOMC to signal something more than a “careful” cutting cycle—just as investors waiting to go short after the final hike never got that clarity last year.
It added; “the degree of US outperformance will also make it difficult for the Dollar to depreciate substantially. When US growth leads the way, that’s typically a positive environment for the Dollar.”
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TAGS: Pound Dollar Forecasts