Pound to Dollar Rate Week Ahead Forecast: Short-Term Gains?

February 4, 2024 - Written by Frank Davies

STORY LINK Pound to Dollar Rate Week Ahead Forecast: Short-Term Gains?

Where next for Sterling? Longer-term forecasts by MUFG show the Pound to Dollar exchange rate could strengthen to 1.31 at the end of 2024.

In contrast, Rabobank has a 3-month forecast of 1.25 while Credit Agricole has an end-2024 forecast of 1.25.

The Bank of England (BoE) pushed back against market expectations of an early cut in interest rates.

GBP/USD, however, was unable to hold gains during the week and dipped to 2-week lows around 1.2630 as expectations of an early US rate cut were trampled by Fed rhetoric and a surge in US payrolls.

The BoE held interest rates at 5.25% which was in line with strong consensus forecasts.

Six members of the committee backed the decision to keep rates on hold while Haskel and Mann continued to vote for an increase in rates due to inflation concerns and Dhingra voted for a cut due to fears of over-tightening.

Bank Governor Bailey welcomed the progress on inflation, but stated that it was too early to consider a cut in interest rates and the bank would need to be confident that inflation would fall to the 2% on a sustainable basis before considering any cut in rates.

Markets overall were slightly less confident that interest rates would be cut at the May meeting with the decision now seen as a close call with June more likely.

According to MUFG; “It is unclear how much data will be required to make the BoE more confident that inflation will continue to slow, and open the door for rate cuts. While the BoE is moving towards lowering grates, market expectations for a cut as soon as in May could prove premature.”

The US reported a surge in non-farm payrolls of 353,000 for January compared with consensus forecasts of around 185,000 while the December increase was revised sharply higher to 333,000 from the original reading of 213,000.

The unemployment rate held at 3.7% compared with expectations of an increase to 3.8%.

Average hourly wages increased 0.5% on the month compared with expectations of 0.3% with the year-on-year increase strengthening to 4.5% from 4.3%.

According to ING; “This combination of strong jobs and wages with unemployment falling indicates clear strength in the US economy and even though inflation is still tracking towards 2% the Federal Reserve simply won’t consider cutting rates at the March FOMC meeting.”

The Federal Reserve held interest rates at 5.50% following the latest policy meeting, in line with consensus forecasts.

Fed Chair Powell stated that he considered it was unlikely that the data would justify cutting rates in March

Rabobank commented; “In our view, the first Fed rate cut of the cycle is more likely in June. This suggests the risk of further USD upside on a one-to-three-month view.”

As far as the BoE is concerned, it commented; “In our view, the BoE rate will remain on hold until September reflecting relatively higher levels of UK inflation.”

Rabobank added; “We see potential for Cable to drop back to 1.2500 on a three-month view but to edge higher to 1.3000 in H2 as the Fed rate cutting cycle progresses.”

According to Credit Agricole; “A successful pushback by the BoE against the dovish market expectations could be supportive for the GBP but only to a degree, given that the currency has already priced in a lot of positives.”

After initial strength, MUFG expects dollar strength will fade; “The Fed caution communicated at the January meeting underlines our view that the Fed’s easing cycle will be more pronounced in H2 and by then the global backdrop will improve modestly with a pick-up in growth in Europe and China helping to push the dollar weaker but within narrow ranges.”

CIBC expects a limited short-term dollar gains, but still expects medium-term losses; “Into H2, we expect the theme of USD weakness to pick up steam as the Fed looks to slow its own version of quantitative tightening (QT) which would put it at odds with how other central banks are proceeding with their own programs.”

According to TD Securities; “The Fed has seemingly priced out March as the start of the cutting cycle. Near-term, that could provide some support to the USD, though we also know that the Fed’s next move is likely to be a cut. We think USD rallies will be quickly faded.”

It added; “Good growth plus disinflation remains bearish for the USD.”

Commerzbank notes the hawkish Fed stance; “When in doubt, wait rather than cut’ seems to be the FOMC's thinking.”

Commerzbank is also broadly positive on the dollar fundamentals; “Ultimately, however, the image of a rather hawkish Fed could be worth a lot in the future. Those who feared that the recent period of high inflation had led to a permanent loss of confidence in the Fed can be reassured. The Fed is currently fighting to regain that confidence.”

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TAGS: Pound Dollar Forecasts