Pound to Dollar Forecast: GBP/USD Could Extend Gains to 1.2825

March 6, 2024 - Written by David Woodsmith

STORY LINK Pound to Dollar Forecast: GBP/USD Could Extend Gains to 1.2825

The Pound to Dollar (GBP/USD) exchange rate drifted ahead of Tuesday’s New York open and then finally broke above the 1.2700 level after slightly weaker-than-expected US data. GBP/USD posted 1-month highs at 1.2730 and held the gains.

GBP/USD will now need to hold above 1.2700 into and through the major events on Wednesday with the UK budget and congressional testimony from Fed Chair Powell.

Favourable developments could lead to a GBP/USD challenge on 1.2825.

The US ISM non-manufacturing index declined to 52.6 for February from 53.4 previously and slightly below consensus forecasts of 53.0.

Business activity and new orders increased at a slightly faster rate, but there was a drop in employment while there was also a slower rate of increases in prices.

Although the decline was modest, it came after a softer-than-expected reading for manufacturing and triggered a fresh element of uncertainty surrounding the US economy.

Treasuries posted gains after the data with a further significant decline in the 10-year bond yield.

The chances of a June Fed rate cut moved to above 70%.

Alvin Tan, head of Asia FX strategy at RBC Capital Markets still considered that markets were confined to narrow ranges. According to Tan; "Markets have kind of settled into an equilibrium, especially in the rates space. We'll need to see the data need to turn either way to really move the market. And of course in the short term there's quite a lot of 'event risk' this week."

Chancellor Hunt will present the budget on Wednesday and the latest leaks suggest that Hunt will cut National Insurance contributions rather than income tax.

Markets will be looking at the overall fiscal stance.

According to Scotiabank; After the Truss government shambles, markets will have little tolerance for irresponsible fiscal giveaways, so even as the government tries to sweeten voters ahead of a likely election in the next few months, the margin for manoeuvre should be limited.”

Joe Tuckey, head of FX analysis at broker Argentex added; “While it is normal for the budget to not induce any real currency volatility, the muscle memory of the (Liz) Truss/Kwarteng horror show could still create a twitch."

He added; "If the gilt market (British government bonds) gets a sniff of any tax cut pledge being unworkable, we could see sterling trade nervously."

Fed Chair Powell will testify to the House financial services committee on Wednesday.

Markets will inevitably be watching his comments on interest rates very closely.

Christopher Wong, currency strategist at OCBC in Singapore commented; "We should expect Fed Chair Powell to reiterate patience and emphasize (there is) no hurry to cut rates. However, these are known knowns and should not affect markets too much unless Powell signals more forceful pushbacks, that could lead to further hawkish re-pricing."

ING noted that Atlantic Fed President Bostic stated that the threat of 'pent-up exuberance' in the business sector could cause a return of inflation should the Federal Reserve cut too quickly.

The bank commented; “his remarks serve as a reminder that the Fed may not pursue its typical easing cycle of consecutive rate cuts with there being no crisis.”

ING expects the dollar to be resilient; “We doubt the market will want to try selling dollars before that testimony. Equally, the overnight news from China suggests local authorities will struggle to reach their 5% growth target and provides no fresh bullish impetus for non-dollar currencies.”

Scotiabank added; “Certainly, in the short run markets are unlikely to take any large positions on the USD ahead of Chairman Powell’s comments tomorrow. More broadly, the overall USD trend continues to look a little frayed around the edges to me. This week’s risk events could support moderate USD gains in the short run but the general tone in the USD since its mid-February peak has been soft.”

The bank considers that GBP/USD could extend gains to 1.2825.

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TAGS: Pound Dollar Forecasts