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Pound to Dollar Exchange Rate Forecast: Markets Expect Labour Landslide

June 9, 2024 - Written by David Woodsmith


SocGen forecasts that the Pound to Dollar (GBP/USD) exchange rate will slide to 1.18 at the end of 2024 amid persistent dollar strength and a vulnerable Pound.

MUFG, however, expects gains to just above 1.30 as the US currency loses ground.

US data for most of the week was mixed with further evidence of a weaker labour market while there was a stronger than expected reading for the services-sector business confidence data.

Friday’s jobs report, however, proved decisive with much stronger than expected data.

In this context, GBP/USD dipped sharply from 11-week highs near 1.2820 to trade around 1.2720.

US non-farm payrolls increased 272,000 for May, much higher than consensus forecasts of around 180,000 with a small downward revision for April to 165,000 from 175,000.

The household survey was weaker as the unemployment rate increased to a 2-year high of 4.0% compared with expectations of no change at 3.9%.

The survey also reported a decline in employment of over 400,000 for the month.

Average earnings increased 0.4% compared with forecasts of 0.3% with a year-on-year increase of 4.1%, above expectations of 3.9%.

The wages and payrolls data sparked renewed inflation fears and fresh doubts over Federal Reserve rate cuts.

Following the data, the chances of September cut dipped to near 50%.

MUFG still sees a weaker labour market; “We see enough in other labour market data to assume a continued moderation in jobs and inflation that allows for rate cuts to unfold, by September most likely although even July remains just about feasible.”

According to SocGen; “History doesn’t have to repeat itself, but we have seen a long period of US outperformance and higher US rates, and if we term both leveraged long USD/JPY trades and European real money invertors’ holdings of Treasuries as ‘carry trades; then the danger must be both that this dollar peak comes later than most expect and is followed by a bigger fall.

The US election will increasingly be on the radar.

MUFG commented; “If the election was imminent, the US dollar for sure would strengthen on a Trump victory. But the election is 5th November and if it takes place against a backdrop of Fed rate cuts and a slowing economy and a weaker labour market, a notable appreciation of the US dollar is a lot less likely.”

BNP still sees a firm dollar; “the bigger risk out of the US election is to the upside in the USD in our view. Price action in Q4 will be especially sensitive to US election outcomes: a Republican sweep may prompt us to turn more bullish on the USD.”

There were no major UK data releases during the week while heavy criticism of Prime Minister Sunak’s D-Day schedule reinforced expectations of a very substantial Labour Party victory.

According to BNP Paribas; “we'd expect fiscally prudent but also growth positive policies to usher in a period of relative political stability that can be supportive for the GBP.”

It added; “The risk to this view is if polls narrow, and introduce some uncertainty, or if Labour move away from a balanced approach to policy. We think the likelihood of either of these risks materialising is low enough for us to view the election as a positive for the GBP but bears watching going into the event.”

CIBC now expects a Bank of England rate cut in August from June previously but does not see this as supporting the Pound.

It added; “A slowing economy allied to the risk of a graduated increase in political risk favours real money GBP longs being at risk of a summer correction, sending Sterling lower.”

HSBC maintains a bearish stance; “The market is priced for a 40% chance of a rate cut at the August BoE meeting, a position we believe understates the true likelihood of a cut. It leaves GBP vulnerable to a dovish June MPC following another round of wages and CPI data.”
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