Pound to Dollar Rate: Slide in risk Appetite saps Sterling Support

October 22, 2023 - Written by Tim Boyer

STORY LINK Pound to Dollar Rate: Slide in risk Appetite saps Sterling Support

Foreign exchange strategists at Commerzbank expect the Pound to Dollar (GBP/USD) exchange rate to edge lower to 1.20 at the end of 2023 with only a tentative recovery to 1.22 at the end of next year.

ING sees scope for a stronger recovery to 1.29 at the end of 2024 amid dollar losses.

Risk appetite has deteriorated further during the week with further unease surrounding the Middle East situation.

GBP/USD dipped to 2-week lows just below 1.2100 before a tentative recovery to 1.2150.

Israel has not yet launched a ground offensive into Gaza, but there remains a strong probability of an offensive and underlying tensions remain intense amid fears over an escalation in the conflict.

Defensive plays have dominated global markets and HSBC commented; “so far this month, gold and the CHF have been the safe havens of choice ahead of the USD, but the USD has still outperformed all of the other G10 currencies. The USD remains a safe haven.”

Danske Bank sees the risk of escalation; “For now, we expect things to get much worse before they get better. The endgame is very uncertain as there is little clarity to what is Israel’s objective and strategy – other than revenge. Netanyahu has promised to destroy Hamas but that is hardly even possible.”

It added; “Also, it may not eventually be in Israel’s interest. Unless Israel wants to reoccupy the Gaza strip, it needs someone to govern the region, and considering the very low legitimacy of the Palestine government, options are scarce.”

The Pound will remain vulnerable while risk appetite remains under pressure.

UK economic developments will remain important with weakness in retail sales for September and a slide in consumer confidence for October.

Thomas Pugh, an economist at accountants RSM UK commented; "The sharp fall in retail sales in September makes it increasingly likely that GDP flatlined or even fell in September. That would mean that GDP as a whole contracted in Q3.”

The latest inflation data was slightly higher than expected, maintaining speculation that the Bank of England will have to maintain higher rates for longer.

The UK has also been caught up in the global bond sell-off as the yield on 30-year bonds touched 25-year highs on Friday.

Headline UK wages growth slowed to 8.1% from 8.5% with underlying growth at 7.8% from 7.9%.

BoE Governor Bailey is still concerned over wages growth. On Friday he commented; "Pay growth as measured is still well above anything that's consistent with the (inflation) target."

His overall rhetoric maintained expectations of close policy calls; "I understand, though, that people will want to see the evidence that inflation is coming down. I think we can see that evidence. I think that by the end of the year, we'll see more evidence of that."

MUFG noted; “The UK rates market continues to slowly remove the extent of monetary tightening priced into the OIS market.”

Credit Agricole considers that there is potential support on yield grounds; “It is worth highlighting, however, that the latest GBP weakness has been at odds with its growing relative rate advantage.”

Commerzbank, however, maintains a negative stance on the Pound; “for now, the environment will remain tricky for Sterling. It remains to be seen how BoE members will react to the recent data. And of course, the next rate meeting on 2nd November is approaching.”

It adds; “As long as the BoE takes a “close your eyes and hope for the best” approach Sterling is likely to remain beleaguered.”

US economic developments will remain important and the data releases overall have remained firm, reinforcing expectations of persistent US out-performance.

Danske Bank considers that the labour market could still be brittle; “Overall, we stress that labour markets have proven to be surprisingly resilient to the Fed's tightening mode. That said, rising labour costs increase the risk of companies eventually turning to layoffs, if demand begins to soften.”

Federal Reserve speakers have consistently stated that the increase in bond yields will have a significant impact in tightening financial conditions.

In this context, there is clear evidence that the central bank will not increase rates at the November policy meeting.

Fed Governor Waller also hinted that the Fed will be on pause for the remainder of the year.

Although Danske expects no further rate hikes, it added; “But all else equal, while we have called for the first Fed rate cuts already in Q1 2024, the most recent labour market data unequivocally increases the risk of rates staying high for longer than we have anticipated.”

US political developments will be watched closely, especially with further chaos in the House of Representatives.

There has been further deadlock with Speaker candidate Johnson failing to secure a majority in the first two votes.

Without a Speaker in place, the House is unable to pass bills or approve an impending White House request for aid to Israel and Ukraine.

There will also be further concerns surrounding the underlying US fiscal trends.

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TAGS: Pound Dollar Forecasts