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Pound to Dollar Exchange Rate Forecast: 1.25 by End 2024 say Credit Agricole

May 26, 2024 - Written by Frank Davies


Standard Chartered forecasts that the Pound to Dollar exchange rate (GBP/USD) will weaken to 1.21 in three months with only a marginal recovery to 1.22 on a 12-month view.

Credit Agricole expects GBP/USD to trade at 1.25 at the end of 2024 before a gain to 1.35 at the end of next year.

GBP/USD hit 2-month highs above 1.2750 after the inflation data before settling just below this level.

Bank of England (BoE) expectations will inevitably be a key element.

The latest UK data recorded a sharp decline in year-on-year inflation to 2.3% from 3.2% the previous month, but this was above consensus forecasts of 2.1%.

The core rate retreated to 3.9% from 4.2% previously, but was significantly above market expectations of 3.6%.

Services-sector inflation declined only marginally to 5.9% from 6.0%.

There was a significant shift in interest rate expectations following the stronger-than-expected data with the chances of a June rate cut dipping sharply to near 10% from close to 50% ahead of the data.

Danske Bank commented; “Service inflation remains key for the BoE as it uses it as a measure of inflation persistence alongside tightness of the labour market and wage growth. Worryingly, alongside the big BoE forecast miss, the momentum in service inflation picked up in April.”

It added; “We now expect the BoE to deliver the first cut of 25bp in August (June previously). Given the later start to the cutting cycle, we subsequently now only expect one 25bp cut in the following quarter, totalling 50bp of cuts for 2024 (previously 75bp).”

Standard Chartered maintains a negative bias towards the Pound; “GBP/USD is also likely to have a bearish bias over the next 3 months, falling to 1.21, as the Bank of England looks to ease rates to support growth. Persistent inflation is a risk to our view.”

Credit Agricole, however, has a relatively positive Pound outlook; “We expect the UK economy to respond more positively to the upcoming easing by the BoE when compared to the Eurozone and the US.”

The bank also noted evidence of increased investor interest in the Pound; “A potential return of investor interest in the currency would represent a significant change of market GBP-sentiment that has been dominated by indifference and/or bearishness in recent years.”

It still expects GBP/USD will still be hampered by a weak dollar this year.

The other main UK event was the announcement by Prime Minister Sunak that a General Election will be held on July 4th.

The announcement came as a surprise given that most commentators were expecting an election would be delayed until the Autumn.

ING commented; “GBP/USD two-month vols jumped around 20bp on the news, but at 6.20 they remain nowhere close to the 7.30 April peak.”

ING added; “We agree that there may be some GBP noise in the run up to the July vote. That could be generated from pre-election policy pledges by Labour. Any news concerning plans on future relationships with the EU could also generate some GBP noise. The most impactful news would probably be on a new Scottish referendum which, as we note above, looks unlikely.”

Inflation expectations were important for the dollar as well.

US business confidence data was stronger than expected with a limited expansion in the PMI manufacturing sector while the services index posted a strong advance to 54.8 from a revised 51.3 previously and the strongest reading for 12 months.

There was further upward pressure on costs, although the overall increase in output prices was below the average seen over the past year.

Scotiabank considers the scope for divergence in monetary policy; “If the Fed is slow or even slower to cuts rates, the potential for rate cuts outside of the US will be compromised to some extent at least.”

It expects the dollar to drift lower; “From a technical point of view, DXY price action over the past week still looks like a consolidation, ahead of renewed softness.”
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