Pound to Dollar Rate Week Ahead Forecast: Waiting for a Break

January 28, 2024 - Written by Frank Davies

STORY LINK Pound to Dollar Rate Week Ahead Forecast: Waiting for a Break

ING’s central case for the Bank of England (BoE) policy meeting is that the Pound to Dollar exchange rate will trade at 1.2700 with a possible range of 1.2650-1.2850 depending on the rate split and forward guidance.

According to Scotiabank, the broader 1.26/1.2825 range for GBP/USD remains intact.

GBP/USD was held in narrow ranges during the week and settled just above 1.2700. The Federal Reserve and BoE policy decisions will be crucial in determining whether the narrow range can break.

According to ING; “We suspect the Bank will still want to tread carefully as it gears up for the first meeting of 2024. But the reality is that defending a “higher for longer” stance on interest rates is getting harder as the inflation backdrop shows signs of improving.”

MUFG noted; “The pound is currently the top performing G10 currency along with the US dollar with the support provided by the expectation that the BoE will be the more cautious central bank relative to the Fed and the ECB especially given some tentative evidence emerging of some moderate pick-up in domestic demand conditions in the UK.”

UK data for the week was broadly encouraging and helped underpin the Pound. Although still in contraction, there was a tentative recovery in the UK PMI manufacturing index to a 9-month high while the services sector posted stronger growth for the month and posted an 8-month high.

There was lower than expected government borrowing data for December, fuelling talk of more significant tax cuts and the latest GfK consumer confidence index recovered further to a 2-year high.

There was, however, still a notable weak spot surrounding retail spending with the CBI retail sales survey deteriorating further to a 3-year low.

If retail sales remain under pressure, spending on services will be crucial for the overall economic performance and the BoE’s take on the economy.

According to Bank of America; "Despite our view that the tightening cycle is now at an end, we continue to believe that the UK rates markets remains overly optimistic in its expectation for a 25bps rate cut in May."

MUFG notes the market positioning; “Given the strong expectations of lower inflation forecasts, a less hawkish vote and more dovish guidance in the statement, we suspect positioning may leave the market reaction more prone to more hawkish surprises.

It added; “Strong concerns expressed about sticky wage growth could see the market price out further the probability of a May cut and quickly see the market push back to June or even August.”

Credit Agricole notes the importance of the BoE meeting; “The GBP has performed better than expected by us so far this year but we maintain a cautious outlook given that the currency’s outperformance is not backed by a superior rate appeal. We may have to revisit our outlook if this changes after next week's BoE.

The US recorded annualised GDP growth of 3.3% for the fourth quarter of 2023 after 4.9% previously, but still well above consensus forecasts of 2.0%.

Bank of America noted firm data; “Incoming data continue to point to a resilient US economy led by consumer spending on the back of a tight labor market, higher-than-expected holiday spending, and healthy balance sheets.”

RBC Capital Markets notes increased optimism that the US economy can secure a controlled landing with lower inflation, but has important doubts; “In our view, it is at least as likely that a hard landing occurs for the economy (indeed, we assign a probability of 60% for a hard landing, versus a 40% chance of a soft landing).”

It added; “We concur that inflation can probably fall further but it might not, especially given new supply chain complications or if a recession fails to arrive. Similarly, without a recession, it isn’t clear that the Fed can actually deliver the rate cuts that so excite the market.”

If the Fed is unable to deliver rate cuts, risk appetite would tend to be weaker which would undermine the Pound.

According to Nordea; “The consensus and the Fed are clearly looking for a significant slowdown in the economy from the current state of above trend growth. And they have been doing that for a long time, even though data have not confirmed their expectations. If anything, economic data have been much stronger than expected. In recent months data even indicates that the economy might be strengthening.”

In this context; “Nordea looks at the US inflation outlook; If economic activity starts to pick up on a sustained basis, the downwards trend in the demand for labour could reverse and start to rise – and that could turn benign inflation into malign inflation.”

This would risk higher-than-expected rates and weaker equities, both negative for GBP/USD.

Westpac commented; “We maintain a constructive multi-week DXY posture, informed by a Fed that ultimately delivers fewer cuts than priced-in and likely continued underwhelming China growth momentum.”

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TAGS: Pound Dollar Forecasts