Pound to Dollar Week Ahead Forecast: Three Week Best Conversion Rate to Hold?

July 7, 2024 - Written by David Woodsmith

STORY LINK Pound to Dollar Week Ahead Forecast: Three Week Best Conversion Rate to Hold?

The Pound to Dollar (GBP/USD) exchange rate strengthened to 3-week highs above 1.2800 on a combination of weaker dollar and positive reaction to the UK General Election result.

Danske still expects GBP/USD will weaken to 1.18 on a 12-month view.

In contrast, MUFG is backing gains to 1.3250 by the first quarter of 2025.

Political and economic developments on both sides of the Atlantic will trigger high volatility over the next few months.

Labour secured a majority of around 175 in the House of Commons amid a slide in support for the Conservative Party with a strong performance from the Reform Party also costing it seats.

Investment banks remain divided on the Pound outlook.

According to Rabobank; “On the hope that UK politics can avoid the dramas and uncertainties associated with the Brexit, Johnson and Truss periods, we expect that GBP can continue its slow grinding recovery.”

It added; “Cable will likely be subjected to further bouts of USD volatility in the coming months on uncertainties connected with both US politics and Fed policy, though we expect GBP/USD to move in a moderately higher range in the months ahead.”

MUFG is also positive on the UK outlook; “we raised our GBP forecasts on the improving economic conditions and on the prospects of a period of political stability ahead – a first for the country going back nearly ten years.”

Danske Bank noted some positives; “We expect a more cooperative stance towards the EU under a Labour government to initially be positive for the UK economy and UK assets by boosting growth and improve the supply side.”

Nevertheless, it noted the risk that political progress would fall short of expectations and added; “Overall, we maintain a moderately negative view on GBP on the back of a dovish BoE and relative growth outlooks.”

HSBC also maintains a negative Pound stance; “The reality is that GBP is focussed on monetary policy and UK fiscal policy is constrained by the economic realities of weak growth and frail government finances. More broadly, we remain cautious on GBP given it looks elevated compared to those rate expectations, and a precarious balance of payments position.”

There was also further speculation during the week that President Biden would withdraw as the Democrat candidate for the November election with markets watching developments very closely.

As far as the economy is concerned, non-farm payrolls increased 206,000 for June, slightly above consensus forecasts of 190,000 while the May increase was revised down to 218,000 from the original estimate of 272,000.

The unemployment rate increased to 4.1% compared with expectations of an unchanged rate of 4.0% and the highest reading since the end of 2021.

Earlier in the week, the ISM services-sector index dipped to 48.8 for June from 53.8 the previous month and well below consensus forecasts of 52.6.

Employment contracted for the fifth successive month while price increases were moderate.

US yields retreated to weekly lows which sapped dollar support while markets priced in close to an 80% chance of a September rate cut.

MUFG commented; “Overall, the developments give us more confidence that inflation and growth in the US will continue to slow providing encouragement for the US rate market to price back in more rate cuts from the Fed in the year ahead. A key assumption behind our outlook for a weaker US dollar heading into next year.”

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TAGS: Pound Dollar Forecasts