Pound to Dollar Week Ahead Outlook: Banks Downgrade GBP/USD Forecasts

April 14, 2024 - Written by David Woodsmith

STORY LINK Pound to Dollar Week Ahead Outlook: Banks Downgrade GBP/USD Forecasts

Investment banks overall have tended to downgrade their Pound to Dollar exchange rate forecasts (GBP/USD).

Credit Agricole and RBC Capital Markets were already forecasting 1.25 and 1.24 respectively for the end of 2024. ING has now dropped its forecast of GBP/USD gains to 1.30 or higher this year and is backing 1.25.

The decisive development this week was stronger than expected US inflation data.

The data triggered an important re-assessment of Federal Reserve expectations and the dollar posted sharp gains.

According to Nordea; “High US CPI data delivered another blow to any hopes of quick rate cuts, at least by the Fed.”

In this environment, the Pound to Dollar (GBP/USD) exchange rate dipped to 4-month lows below 1.2430.

Another important element during the week was sharp gain in gold and commodity prices which helped push the FTSE 100 index to above the 8,000 level.

Strength in risk appetite did help save the Pound from further punishment.

Headline US consumer prices increased 0.4% on the month with the year-on-year inflation rate increasing to 3.5% from 3.2% and compared with consensus forecasts of 3.4%.

Core prices also increased 0.4% for the month compared with expectations of 0.3% with the annual rate unchanged at 3.8% and above forecasts of 3.7%.

The data triggered a sharp shift in expectations surrounding Federal Reserve interest rates with a June cut now seen as unlikely, although not ruled out completely.

A cut is not priced in until September with some banks contemplating no cut at all this year.

According to Bank of America; “The acceleration of inflation this year makes a cut prior to December challenging in our view.”

There was an important impact on yield spreads.

ING noted; “Markets are now pricing US rates higher than the UK equivalent in two years’ time, which hasn’t been true for the majority of the last two years.”

This shift in expectations will have an impact on the Pound.

As far as the UK is concerned, ING notes the importance of near-term inflation data, especially the April figures released in May.

There will be a favourable impact from falling retail energy prices, but the services component will also be important, especially with the annual increases for annual contract-linked prices coming through.

The bank added; “Until we’ve seen that data – and unless the BoE comes out strongly in favour of a June rate cut at its early-May meeting – we’re narrowly favouring an August start.”

ING does expect substantial BoE cuts over the medium term; “to some extent, we’re splitting hairs, and the more important point is that the totality of the rate cutting cycle is likely to be a little larger than markets are currently pricing.

It forecasts that rates will eventually decline to 3% or slightly lower while markets are forecasting 3.55%.

This leaves the potential for a shift in expectations which will undermine the Pound.

MUFG is more positive on the Pound; “Appetite for buying the pound is picking up with investors clearly seeing the signs of improvement and the potential for inflation coming down but for the BoE to be more cautious than most other G10 central banks in cutting rates.”

Credit Agricole is wary over diverging yield spreads; “We continue to worry that the support for GBP/USD from the relative GBP-USD rate spread continues to crumble after the red-hot US CPI print forced investors to further pare back their Fed rate cut expectations.”

It added; “This happened despite the fact that the UK rates markets have also reduced their BoE rate cut expectations albeit to a lesser extent. We therefore maintain a cautious stance on GBP/USD in the near term.”

RBC is still fretting over fundamentals; “the fiscal backdrop is still constrained, amid a tight spending profile & rising demand for public services, and any deterioration in policy credibility will leave GBP vulnerable.”

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TAGS: Pound Dollar Forecasts