Pound to Dollar Week Ahead Forecast: Are Gains above 1.30 Sustainable?

September 2, 2024 - Written by John Cameron

STORY LINK Pound to Dollar Week Ahead Forecast: Are Gains above 1.30 Sustainable?

The Pound to Dollar (GBP/USD) exchange rate surged to 28-month highs above 1.32 in the latest week before a limited correction to around 1.3150.

A key market debate is whether these levels are justified.

According to HSBC; “one could make the case that GBP-USD should be trading below 1.25 rather than above 1.30 if we look at the exchange rate relative to 2Y rate differentials.”

MUFG is more positive. It had previously forecast 1.3250 by March 2025 and added; “We will be adjusting higher our GBP forecast profile in the next forecast update.”

As far as interest rates are concerned, markets remain convinced that the Federal Reserve will cut at the September policy meeting with no further Bank of England move until at least November.

Data releases this week have not triggered any significant shift in expectations.

There has been no push back by Fed speakers, but also no evidence of panic and the most likely outcome is that there will be a 25 basis-point cut unless there is extreme data.

The US jobs data at the end of the week will be extremely important for sentiment following weaker than expected data last month.

Another weak release for September would trigger fresh speculation over a larger 50 basis-point cut which would hurt the dollar while a solid increase in jobs would shift expectations further towards a smaller rate cut and tend to underpin the US currency.

SocGen commented; “Another soft or softish report (anything below the consensus of 160k) will see the focus much more on selling dollars than ‘selling dollar rallies.”

Socgen also pointed to the possibility of substantial dollar selling; “This reflects growing concern about further dollar selling and a realisation that dollar buying in recent years has come in all shapes and huge sizes. It’s very tempting to see echoes of the dollar’s huge reversals after the dollar rallies in the 1980s and 1990s.”

The first week of September following the US Labor Day holiday is also important as it marks the end of the Summer trading period with trading volumes returning to normal.

J P Morgan is sceptical that gains can be sustained; “We suspect that the market will fade from those levels and potentially form a broader bearish trend reversal pattern; however, there is little evidence on in the high-frequency price action to bolster our conviction in that view at the moment.”

HSBC is still broadly positive on the dollar; “Goldilocks still retains a mostly American accent which means the market could revert to a theme of USD-bullish US exceptionalism.”

The bank added; “GBP looks rich relative to rates, with its strength mostly related to a positive correlation with risk appetite. This leaves GBP vulnerable to any retreat in US rate cut expectations from both a rates and risk appetite perspective. GBP-USD has found the air thin above 1.30 generally, and while positioning is no longer extreme, we see downside risks.”

According to Danske; “recent price action raises the question of whether the market is shifting to a broad-based bearish view on the USD and if the USD is on the cusp of significant further weakness.”

Danske does not consider that this is the case; “While it is clear that the US economy is slowing and that inflation is close to being under control, we do not think US data has been weak enough to justify the substantial repricing, and we ultimately believe that the Fed will end this year by delivering fewer cuts than the markets are currently pricing.”

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TAGS: Pound Dollar Forecasts