Pound to Dollar Exchange Rate Forecasts: Fed and Bank of England Crucial

June 16, 2024 - Written by David Woodsmith

STORY LINK Pound to Dollar Exchange Rate Forecasts: Fed and Bank of England Crucial

RBC Capital Markets' currency analysts expect GBP/USD will weaken to 1.23 at the end of this year with further losses to 1.19 at the end of 2025.

Although Pound sentiment held firm, the Pound to Dollar (GBP/USD) exchange rate retreated to 4-week lows at 1.2660 as the dollar posted significant net gains.

The UK data continued to suggest a weaker labour market with the unemployment rate increasing to 4.4% in the three months to April from 4.3% previously and the highest rate since September 2021.

The inactivity rate increased to the highest level for close to 10 years.

Wage pressures were still elevated with underlying wages growth remaining at 5.9% and compared with expectations of 5.7%.

Abrdn's deputy chief economist Luke Bartholomew commented; "UK wage growth remains very strong, but with further evidence that the labour market is cooling.”

He added; "We expect the first rate cut in August, but that is dependent on further progress on bringing down underlying inflation pressure over the next few months."

GDP was unchanged for April as adverse weather had a negative impact on retail sales and construction spending.

It is very unlikely that the BoE will cut rates this month with markets focussing on the August decision.

Rabobank commented; “The MPC is considering lowering interest rates, but the data does not support this decision. The political context would also make a pre-election rate cut needlessly complex. We remain of the view that both wage growth and services inflation do not align yet with a sustained return to 2% inflation.”

It added; “Despite this, we see the MPC adjusting its policy stance and forecast a first rate cut in August. However, if inflation figures for May and June again disappoint, we will reevaluate this. We have revised higher our forecast for the terminal rate to 3.00%.”

According to HSBC; “While a loosening labor market and stagnating economy should give the BoE more room to cut, we think it does not carry much bearing as the BoE needs to see clear signs of softer headline and core inflation for a cut. The May inflation data releasing on 19 June will be the key.”

It added; “Based on rate differentials, we think GBP appears to be stretched against the USD. If the respective inflation prints in the US and the UK signal growing signs of policy divergence, it could help weaken GBP-USD.

According to RBC Currency Markets; “Our economists still see the first cut in August and another 25bps by year-end (see here). This poses some downside risk to GBP, with markets pricing -34bps this year.”

It added; “we view the risks skewed to the downside for GBP as long as UK’s imbalances continue to require persistent capital inflows and the UK resumes running ‘triple’ deficits.”

The US inflation data was better than expected with headline consumer prices unchanged on the month to give an annual increase of 3.3% from 3.4% previously.

Core prices increased 0.2% on the month with an annual increase of 3.4% from 3.6% previously.

The Federal Reserve held interest rates at 5.50%, in line with strong market expectations.

The Fed also released the latest economic projections including interest rate forecasts from committee members.

In the previous update in March, the median forecast was for three rate cuts this year.

In the latest update, this was changed to just one rate cut for the year, although 8 of the 19 members forecast two cuts.

Fed Chair Powell remained cautious over the inflation developments and, although he welcomed the latest data, he again warned that the Fed would need more evidence of inflation moving to the 2% target before sanctioning a cut in interest rates.

Overall, markets see a 60% chance of a move in September.

According to ING; “We think the risk is the Fed end up doing more policy easing over the next 18 months than they are signalling with the Fed funds target rate settling at 4% in 1H 2025.”

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TAGS: Pound Dollar Forecasts