Pound to Dollar 12-Month Outlook: GBP/USD Exchange Rate to Weaken to 1.18

June 23, 2024 - Written by Frank Davies

STORY LINK Pound to Dollar 12-Month Outlook: GBP/USD Exchange Rate to Weaken to 1.18

Danske Bank forecasts that the Pound to Dollar (GBP/USD) exchange rate will weaken to 1.18 on a 12-month view.

Bank of America is still forecasting gains to 1.33 at the end of 2024.

GBP/USD lost ground during the week with a slide to 5-week lows close to 1.2620 as European currencies struggled while the Bank of England moved closer to an interest rate cut.

The Bank of England held interest rates at 5.25% at the latest meeting which was in line with consensus forecasts.

There was another 7-2 vote for the decision as Dhingra and Ramsden voted to cut rates by 25 basis points to 5.00%.

There was, however, a significant element of division within the majority that voted for unchanged rates.

It suggested that four members were still concerned over inflation trends, but three members were more confident that deflation trends remained on track and considered that the decision this month was finely balanced.

ING commented; “we read the minutes as slightly bearish for the pound as it raises expectations we could hear from the BoE dovish elements once the 4 July general election has passed.”

According to Rabobank; “The central bank appears to be preparing the markets for a first rate cut in August, which continues to be our base case. We have, however, removed a subsequent September cut from our forecasts. This follows yesterday’s services inflation data. Services inflation remains a concern, and whether it is diminishing or persistent is largely a matter of judgment, with notable differences of opinion within the MPC.”

It added; “Governor Bailey didn’t add additional colour to this meeting outcome and the pre-election purdah means we will hear nothing from members until after July 4.”

Danske Bank commented; “Before the next meeting on 1 August, we get a limited amount of data. Namely one jobs report for May/June and the inflation report for June.

It added; “We expect the data releases to show further signs easing inflationary pressures and wage growth to level off, leaving the BoE comfortable enough to opt for a rate cut at the August meeting. Risks are however to a later start to the cutting cycle if we get a topside surprise to especially service inflation.”

According to ING; “the risks of sterling weakness emerging over coming months should largely be witnessed in GBP/USD, which we expect to trade back under 1.25.”

There were also still reservations over medium-term UK fiscal trends.

For the first two months of fiscal 2024/25, the budget deficit increased to £33.5bn from £33.1bn the previous year with the debt/GDP ratio increasing to 99.8%.

According to Danske Bank; “Regardless of the election outcome, fiscal policy is likely to remain constrained and we expect the market reaction to be muted in our base case of a Labour majority. However, closer ties to the EU, policies aimed at boosting growth and the supply side of the economy, less policy uncertainty are on balance GBP positive although we do not want to overstate the impact.

The latest US data was mixed with weaker than expected retail sales data offset by a stronger than expected PMI business confidence data.

There was evidence of a weaker labour market with jobless claims remaining at elevated levels.

Inflation trends will be very important for the Federal Reserve and market expectations surrounding interest rates.

Nordea does not think that the inflation data will co-operate; “We think that the soft May US CPI print was mainly an outlier and continue to expect that it will take time for the incoming data to persuade the Fed to cut rates.”

It added; “We have for some time argued that inflation is heading lower, but that it would be a slow and bumpy process. It will probably take until December before the central bank is convinced that the price problem has been solved.”

Although Danske expects Fed rate cuts, it expects weaker risk appetite will undermine the Pound.

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TAGS: Pound Dollar Forecasts