Pound to US Dollar Week Ahead Exchange Rate Forecast: BoE Key Risk

May 6, 2024 - Written by Frank Davies

STORY LINK Pound to US Dollar Week Ahead Exchange Rate Forecast: BoE Key Risk

Morgan Stanley expects monetary policy divergence will undermine the Pound with the risk of a Pound to Dollar exchange rate (GBP/USD) slide to 1.20.

CIBC also expects divergence and has an end-2024 GBP/USD forecast of 1.25.

MUFG, however, expects a net gain to 1.2950 at the end of the year.

Bank of England and Federal Reserve policies are likely to be crucial.

According to Morgan Stanley; “If markets were to price out Fed cuts for this year, while the BOE continues with its easing cycle as our economists expect (75 basis points for this year), we think that cable could test 1.20 again."

GBP/USD hit 3-week highs at 1.2630 after softer-than-expected US jobs data before a retreat to below 1.2550.

Domestic influences were limited with no surprise in markets that the Conservative Party suffered sharp losses in local elections.

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

Chair Powell noted that potential interest rate cuts would have to be delayed due to the impact of higher-than-expected inflation over the past few months.

Powell, however, does not expect a rate hike will be necessary.

As far as data is concerned, there were hints of vulnerability.

Non-farm payrolls increased 175,000 for April compared with consensus forecasts of around 240,000 while there was a small upward revision for the March data to 315,000 from the 303,000 reported previously.

The unemployment rate edged higher to 3.9% from 3.8%.

Average hourly earnings increased 0.2% on the month, slightly below expectations of 0.3%, with a slowdown in year-on-year growth to 3.9% from 4.1%.

The ISM manufacturing and services sector reports were both weaker than expected in contraction territory which triggered fresh doubts over the US outlook.

Deutsche Bank pointed to some underlying evidence of vulnerability; “The household survey numbers have been held up by a rise in part-time employment... full-time employment has fallen over the last year.”

It added; “US small businesses are their least optimistic since 2012, even less so than during the pandemic.”

Following the data, markets raised the possibility of a July rate cut to around 40%.

CIBC, however, has shifted its view; “The resilience of US data has led to a hawkish repricing for the Fed and amplified the divergence story. We’ve recalibrated our view and are now expecting a firmer USD profile over the forecast horizon.”

BNP Paribas expects that the first Fed rate cut will be delivered in December, but added; “Powell’s comments show the FOMC is quite attuned to the labor market side of the mandate, and a stumble in the job market would enhance the case for a pre-election cut.

Bank of England policies will also be crucial for the Pound.

According to CIBC; “Although the BoE continues to worry over the perception of inflation persistence, via elevated wage growth and amplified service sector prices, we have moved to consider an earlier and more aggressive BoE easing profile, we assume a first cut in June, with a further two cuts likely in 2024.”

MUFG sees close votes ahead; “We are maintaining our view of the BoE cutting rates in June although admittedly the risk is certainly skewed in favour of a hold and the first cut not coming until August. The MPC is divided and a vote to cut in June would likely be very close.”

HSBC expects the BoE to begin cutting rates in June with Pound vulnerability; “Given the degree of GBP outperformance this year, the beginning of the BoE’s easing cycle could have a bigger impact this time round.”

Credit Agricole sees limited downside risks; “We believe that some negatives are already in the price of GBP/USD and FX investors already appear to be short the currency pair according to our positioning data. This could point to some cautious consolidation for GBP/USD especially if the BoE convinces investors that cuts are not imminent.

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TAGS: Pound Dollar Forecasts