Pound to Dollar Exchange Rate Forecast: Drop to 1.2000 Possible say UoB

October 26, 2023 - Written by James Fuller

STORY LINK Pound to Dollar Exchange Rate Forecast: Drop to 1.2000 Possible say UoB

The Pound Sterling (GBP) remained under pressure against the US Dollar (USD) on Wednesday with domestic and global elements undermining support for the UK currency.

The Pound to Dollar (GBP/USD) exchange rate retreated to 3-week lows near 1.2070 before stabilising.

On a near-term view, markets will look to target the 1.20 level. Longer term, Danske Bank forecasts 1.16 on a 12-month view.

There have been no further significant UK data releases and there has been no fresh evidence to counter expectations that a fragile economy will prevent the Bank of England (BoE) from raising interest rates further.

Danske Bank maintains a downbeat stance; “The economic outlook is increasingly weakening in the UK.”

According to Credit Agricole; “At this stage, with the next BoE looming next week, extra GBP slippage may only be prevented by the facts that the GBP remains oversold and is marginally undervalued.”

HSBC expects another vote to hold rates; “It may be that Bank Rate goes higher from here (though that is not our central case), but it appears unlikely that that will happen next week.

It added; “We have not seen anything today that jars with our expectation that the MPC will vote by 6-3 to keep Bank Rate on hold at 5.25%.”

Viraj Patel, global macro strategist at Vanda Research takes a similar view; "I'm hesitant to say the BoE is done because they are data dependent and so to make that call you need visibility on what things will look like in three months and that's pretty tricky right now. Based on the data seen so far, however, I don't see them hiking next week."

He added; "It's obvious there's some slowing momentum. You struggle to paint a bullish picture when you have weak macro and a potentially more dovish BoE."

The dollar overall has maintained a strong tone in global markets. The US data flow has supported to narrative of US out-performance in global terms.

On Wednesday, for example, US new home sales jumped to an annual rate of 759,000 in September from a revised 676,000 previously.

The US 10-year yield also increased to just above 4.95%.

The relationship between yields and dollar moves has not been consistent which can cause erratic moves.

HSBC considers that the dollar overall will remain robust. It notes; “The problem is that the interplay between yields, risk and the USD is proving fickle. So it is important to step back from the daily noise and highlight the US exceptionalism theme which drove the USD rally still remains in play.”

MUFG added; The window for USD strength that looked to be closing at the start of the week remains open for now.”

US equities lost ground again on Wednesday with a sharp 2.4% slide in the Nasdaq index and equity futures lost ground again on Thursday.

Weak risk appetite will tend to support the dollar through defensive demand, but sustained outflows from Wall Street on a slide in the technology sector could undermine the dollar.

Rodrigo Catril, senior FX strategist at National Australia Bank noted choppy conditions; “Markets are showing renewed signs of uneasiness with US corporate earnings results an additional source of volatility.”

ING notes fundamental dollar support will clash with valuations; “All in all, the dollar retains the negatives of an overbought currency and is therefore at risk of some technical corrections, but the growth and rate fundamentals are building a stronger floor for the greenback. We see a greater risk that Japanese yen interventions drag the dollar lower, if anything.”

Commerzbank is more cautious; “The expectations of a soft landing are largely priced in now and there is very little scope for Dollar appreciation.”

According to UoB; “Downward momentum is beginning to improve. From here, as long as GBP stays below 1.2200, it is likely to test the early October low near 1.2040. A break of this major support could potentially trigger a further drop to 1.2000.”

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TAGS: Pound Dollar Forecasts