Pound to Dollar Exchange Rate Forecast: USD Tipped to Dominate Cable

June 2, 2024 - Written by David Woodsmith

STORY LINK Pound to Dollar Exchange Rate Forecast: USD Tipped to Dominate Cable

Morgan Stanley currency strategists expect the dollar will continue to dominate markets with the Pound to Dollar (GBP/USD) exchange rate retreating to 1.24 at the end of 2024.

Bank of America, however, expects that GBP/USD will strengthen to 1.33 at the end of 2024.

The Pound to Dollar (GBP/USD) exchange rate hit 1.2800 during the week before settling with limited losses to 1.2730.

UK data releases were slightly supportive during the week with Nationwide reporting an increase in house prices for May.

The Lloyds Bank Business barometer also strengthened to an 8-year high with overall confidence in the economy also improving.

The General Election campaign has not ruffled the Pound.

According to J P Morgan; “it is hard to see the UK election having a major near-term impact on Sterling. In the risk case that Brexit-related assumptions begin to change, then we can look to the pre-pandemic Brexit risk premium of 7-12% in the GBP NEER as a guide for potential long term valuation adjustments.”

It added; A likely Labour victory, is unlikely to be a “surprise” for UK rate markets and we expect a Labour administration would initially take a cautious fiscal approach with limited macro-economic consequences.

Markets do not expect that the Bank of England will cut interest rates in June, especially with the decision coming in the middle of the General Election campaign.

NatWest’s Paul Robson commented; “Our UK team holds their expectations for the Bank of England (BoE) to cut interest rates at their August meeting, but will now only deliver 0.75% of easing in 2024 (compared with their previous expectations of 1% of interest rate cuts).

He is relatively positive towards the Pound; “To my mind, this may have put a floor on further Sterling weakness. Taken together with news of overseas takeover interest in UK assets, the near-term outlook for Sterling may be brighter than some had previously envisioned.”

The US core PCE prices index increased 0.2% for April compared with expectations of a 0.3% increase while the annual rate met expectations at 2.8%.

The data provided an element of relief surrounding US inflation and markets moved to price in just over a 50% chance that interest rates would be cut in September.

Jim Reid, strategist at Deutsche Bank, said U.S. PCE data "still gets a lot of attention because it’s what the Fed officially targets".

Fed rhetoric has remained broadly hawkish. According to Fed Governor Logan it is too soon to think about rate cuts and that policy may not be as restrictive as the central bank thinks.

Deutsche Bank commented; “that adds to the theme from various speakers recently, suggesting the Fed will take their time as they seek to gain further confidence in the path of inflation.”

MUFG commented; “The timing of the first rate cut will be data dependent and recent inflation data has not supported cutting rates.”

US political developments will also be increasingly important ahead of the November election and former President Trump was convicted of felony this week.

According to MUFG; “Market participants will be watching closely to see if the guilty verdict has a significant negative impact on his public support. Prior to the verdict Trump held narrow leads in key swing states putting him in a strong position to be re-elected as president for a second term. Evidence of softening support for Trump would help to ease upside risks for the US dollar later this year, but that is far from guaranteed at this stage.”

According to Morgan Stanley, political and economic factors will underpin the dollar; “Supportive growth and rate differentials join another potential USD tailwind – an increased risk premium priced for the 2024 US election.”

Credit Agricole still sees cope for continuing near-term US out-performance; “Our US economists expect US activity to have a last push this quarter before cooling more substantially thereafter.”

It added; “Such a shift in gear could ultimately force the USD to fall down the ranks too, although possibly being more a case for 2025 than for later this year.”

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TAGS: Pound Dollar Forecasts