Pound to Dollar Week Ahead Forecast: Ranges 1.18-1.131 in Twelve Months

February 18, 2024 - Written by John Cameron

STORY LINK Pound to Dollar Week Ahead Forecast: Ranges 1.18-1.131 in Twelve Months

ING analysts forecast the Pound to Dollar exchange rate (GBP/USD) will strengthen to 1.31 on a 12-month view as the dollar loses ground.

Danske Bank, however, expects GBP/USD will weaken to 1.18 on the same timeframe.

GBP/USD was held in tight ranges overall and traded just below 1.2600 after finding support above February lows.

Inflation data on both sides of the Atlantic were key influences during the week.

The headline US consumer prices inflation rate declined to 3.1% from 3.4%, but above expectations of 2.9% while the core rate held at 3.9%.

Credit Agricole commented; “For the Fed, there were few silver linings as the stickiness in services inflation, especially for core services less shelter, will do nothing to provide the additional confidence that the Fed wants to see before being ready to cut rates.”

It added; “One report on its own does not make a trend, and the Fed’s preferred PCE data has been softer than CPI data over the past few months, so we would not completely rule out a cut by June.”

JP Morgan noted the importance of forthcoming data; “There are still four more CPI reports scheduled for release ahead of the end of the June FOMC meeting and we are sticking with our call that the Fed will start lowering rates at that meeting.”

Regional business surveys also improved, but retail sales declined and there was mixed overall evidence.

MUFG noted that there has been some evidence of weaker US data; “We did also get the NFIB Small Business Optimism survey data yesterday and the overall index fell 2pts to the lowest level since May last year. The Plans to Hire index fell to 14%, the lowest level since May 2020 during the worst period of the pandemic.”

According to Barclays; “we still think the scope for dovish surprises by the Fed is smaller than for other G10 central banks, which should keep the dollar supported for longer.”

UK inflation data was slightly lower than expected with the headline inflation rate holding at 4.0% compared with expectations of a small increase to 4.1% while core inflation held at 5.1% and below expectations of 5.2%.

Wages data, however, was stronger than expected which will maintain unease within the Bank of England.

The UK registered a technical recession for the second half of 2023, while there was a much stronger than expected rebound in January retail sales.

HSBC commented on the timing of a Bank of England interest rate cut following the latest inflation data; “The data has been sufficient to nudge the market probability of a June rate cut back above 50%. However, our economists believe the still tight labour market and elevated services inflation may encourage the BoE to wait until August before easing.”

ING is relatively positive on the economy; “The UK may have met the definition of a technical recession in the fourth quarter, but the growth outlook is looking brighter for 2024.”

It added; “Remember too that the Bank of England is focused not on growth, but services inflation and wages as a guide for when to begin cutting rates.”

MUFG discusses the potential timing of a rate cut; “June certainly remains very much in play for the first rate cut given headline CPI could well be below the 2% target by then and more compelling evidence of slower wage growth should be evident.”

At this stage the bank is backing a June cut.

Bank of America expects the UK will be the last of the major central banks to cut rates.

There will also be other important UK influences, especially with strong political pressure to cut taxes after another set of dismal by-election results for the government.

ING expects fiscal policy will be important; “On the immediate horizon is the March budget. Our current thought is that this may be sterling positive – in that large, credible tax cuts are welcomed. If Chancellor Jeremy Hunt misreads the market, however – e.g., offers more than £20bn in tax cuts – sterling and the gilt market could come under pressure again.”

Overall global economic and risk trends will also remain important for the Pound.

MUFG noted the importance of global conditions; “Overall, financial conditions remain much easier than in October but this inflation print certainly reinforces the prospect of financial conditions tightening further over the near-term.”

HSBC still expects dollar strength will dominate; “We believe the strong USD story is not over yet, with the likelihood that the Fed lowers its policy rate gradually, US yields stay relatively high and global growth remains slow.”

It noted that Chinese developments could be crucial and added; “If China were to surprise on the upside – growth and sentiment – this could make us think differently about our belief in the strong USD.”

According to Credit Agricole; “The near-term outlook for the GBP should remain a function of the currency’s relative rate appeal and the resilience of risk sentiment. We would expect that both would be broadly supportive.”

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TAGS: Pound Dollar Forecasts