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Pound to US Dollar Week Ahead Exchange Rate Forecast: "Shortest for the Year"

May 12, 2024 - Written by David Woodsmith


Currency exchange strategists at Bank of America (BoA) forecast that the Pound to Dollar exchange rate (GBP/USD) will strengthen to 1.33 at the end of this year with a further advance to 1.41 at the end of 2025.

BoA expects overall yields will underpin Pound buying in the context of carry trades while the clear out of long positions has removed the potential liquidation threat.

Goldman Sachs, however, has downgraded its 12-month GBP/USD forecast to 1.28 from 1.35.

Goldman sees a less benign global scenario; “with hawkish policy repricing driving markets recently, the pro-cyclical backdrop for the currency is less supportive than it was earlier in the year, and for now, it means that GBP is unfortunately caught in the middle.”

The Bank of England (BoE) held interest rates at 5.25%, in line with the strong consensus forecast.

There was a 7-2 vote for the decision with Deputy Governor Ramsden joining Dhingra in voting to cut rates.

There was a net downgrading of inflation forecasts and a small upward revision to growth projections.

Governor Bailey remained optimistic over economic trends and does expect that interest rates will be cut over the next few months, but added that more evidence of a sustainable decline inflation is needed before rates could be cut.

ING commented; “The Bank of England is getting very close to its first rate cut. That much is clear from the latest policy statement which, while keeping rates on hold at 5.25%, has a distinctly more optimistic flair. It echoes recent comments from Governor Andrew Bailey, who has been hammering home the message that the UK’s inflation outlook is quite different to the US.”

The bank added; “We’re still leaning slightly more towards an August start date for rate cuts, though it’s a close call. What isn’t in doubt, is that the Bank is comfortable with moving ahead of the Fed.”

According to Rabobank; “A rate cut in June is on the table, if incoming data does point at a significant deceleration of wage and services inflation. Considering the elevated risk of that not occurring yet, August remains our meeting of choice for the first rate cut.”

According to Citibank; “The timing of the first cut we think remains finely balanced between June and August. If the MPC do begin in June, we think the MPC may now skip August, before cutting at every subsequent meeting into 2025.”

Looking at the role of yields Citi considers that if UK yields declined 100 basis points relative to US yields, there would be a 3.5% decline in GBP/USD.

From current levels this would push GBP/USD below 1.21.

BoA looks at market positioning and noted; “April has seen a cleansing of GBP positioning to the shortest for the year.”

It added; “One of our concerns heading into April was the overhang of long positioning in GBP and this was an issue for the pound. The liquidation was accelerated by geopolitical tensions, rising volatility and a pricing out of near-term Fed rate cuts.”

BoA also underlines a fundamental relationship for GBP with the Pound performing well when volatility is low.

It noted; “FX volatility has been a good lead indicator for the pound historically. There has been a recent disconnect which means either of the following: FX volatility needs to rise, or GBP needs to rise. We favour the latter; unless there has been a fundamental break in this relationship, we do not expect such divergence to continue.

Credit Agricole we see scope for cautious GBP consolidation, especially if the BoE convinces investors that cuts are not imminent.

Credit Agricole, however, also maintains a positive stance on the dollar; “While the USD rally has stalled, the currency remains a buy on dips given that it still has some of the best fundamentals in G10 – eg, nominal and real carry appeal as well as superior growth prospects and liquidity.”

It added; “We therefore believe that the USD could regain ground once the current positioning correction has run its course in the coming weeks.”
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