Pound to Dollar Forecast: "1.1800-1.1850 area", say Wells Fargo

October 29, 2023 - Written by John Cameron

STORY LINK Pound to Dollar Forecast: "1.1800-1.1850 area", say Wells Fargo

Foreign exchange strategists at Westpac consider that the Pound to Dollar exchange rate will be vulnerable to a slide to 1.1800-1.1850.

Most investment banks expect a test of support near 1.2000, although Danske Bank sees scope for a near-term rebound to 1.24 before a slide to 1.16 on a 12-month view.

Here are the latest institutional forecasts (Westpac, ING, MUFG, Bank of America, NatWest) and the GBP/USD news for the week."

According to Westpac; “if risk appetite deteriorates further. It notes any further bouts of risk aversion could still force a flush through pivotal 1.2050 support towards the 1.1800-1.1850 area.”

During the week, GBP/USD dipped to 3-week lows around 1.2075 before a recovery to 1.2140.

The overall UK data profile has remained weak, reinforcing concerns over the outlook.

The latest CBI retail sales survey declined to –36 in October from –14 in September. This was well below consensus forecasts of -16 and the second-weakest reading since March 2021. It was also the sixth successive reading in contraction territory.

Retailers expect a further decline in November, although the rate of decline is expected to moderate.

The CBI also released a notably weak industrial survey earlier in the week while the manufacturing and services PMI business confidence indices remained in contraction territory for the month.

The labour-market data was mixed with new experimental data treated with a significant degree of scepticism.

Markets are increasingly confident that the Bank of England will hold rates steady at 5.25% at the November 2nd policy meeting.

Money markets are pricing in over a 90% chance that the bank will decide against increasing rates further.

ING commented; “With less than a week to go to the Bank of England meeting and the MPC members in the black-out period, markets have cemented their view there will be no change at any of the upcoming policy meetings.”

ING also notes that the notable shift in BoE rate expectations during the last few months has triggered a move in yield spreads against the Pound with the weakest currency support since April.

In this context, it adds; “Risks remain skewed to further attempts to the 1.2000 key support in the short term in Cable as the dollar still appears to have room to catch up with its better rate profile.”

Risk conditions will remain a key element, especially given weakness in equity markets this week. If risk appetite is notably weak, the UK currency will tend to come under pressure.

Overnight, the US attacked two Iran-linked facilities in Syria which were described as “precision self-defence” strikes which were in response to increased attacks on US troops in the region.

According to Bank of America; “On the geopolitical front, there seems to be a real risk that the market is overly complacent, and not fully positioned for a quicker unravelling of a very tense situation. Should the conflict escalate further, we would expect the CHF to continue to outperform, while the USD’s relative safe-haven allure would likely reassert itself, despite the factors that may have held it back thus far.”

Central banks are usually more wary over adjusting monetary policy when geo-political tensions are elevated, especially with volatility in energy prices.

NatWest Markets commented; "Recent geopolitical events will probably induce a modicum of monetary policy caution, reinforcing the likelihood of unaltered policy settings."

Overall confidence in the global economy has also tended to deteriorate which has curbed support for the Pound.

There has been a jump in bond yields and Danske Bank commented; “This has increased the risk of a hard landing for the global economy and triggered sour risk appetite in equity markets.”

With a significant global sell-off, the US S&P 500 index has declined sharply to a 5-month low.

Danske added; “The UK runs a large current-account deficit, which makes GBP vulnerable when capital inflows fade; this keeps GBP at risk in the wake of a risk sell-off.”

US data has remained generally robust.

Although there are strong expectations that the Federal Reserve will leave interest rates on hold at the November meeting, there are also expectations that strong data will persuade the Fed that rates need to stay higher for longer.

GDP increased at an annualised rate of 4.9% in the third quarter of 2023 from 2.1% the previous quarter and above consensus forecasts of 4.3%.

Consumer spending increased 4.0% from 0.6% previously with government spending also providing a significant impetus.

The latest jobless claims data indicated that the labour-market remained firm.

The core PCE prices index increased 0.3% for September with the annual rate at 3.7% from 3.8% previously and in line with consensus forecasts.

MUFG is still cautious over the US outlook and points to the fact that there was a significant boost to the GDP data from a build-up in inventories.

If demand dips, there will be a major liquidation of inventories which would undermine the GDP data.

MUFG commented; “We still do not expect that dynamic to play out for much longer and certainly by the time of the December meeting would expect to see lower UST bond yields as US economic data turns weaker.”

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TAGS: Pound Dollar Forecasts