Pound to Dollar Exchange Rate Forecast: Binary US Election Risks

September 8, 2024 - Written by David Woodsmith

STORY LINK Pound to Dollar Exchange Rate Forecast: Binary US Election Risks

There remains an intense debate over the state of the US economy, the potential Federal Reserve policy reaction and the dollar impact.

Markets are also having to contend with political uncertainty with November US elections less than two months away.

The Pound is a relative oasis of calm with evidence of steady growth and a cautious Bank of England.

The data during the week clearly indicated a weaker labour market.

MUFG commented; “We have lowered our US dollar forecasts, taking account of more compelling evidence of an imminent slowdown in the US labour market. However, we are likely to see more financial market volatility with uncertainties over the scale of downturn in the US and uncertainties over economic policy in the US after the election in November.”

MUFG does forecast that the Pound to Dollar (GBP/USD) exchange rate will strengthen to 1.3410 by March 2025.

Barclays expects GBP/USD buying on dips and added; “higher targets up towards 1.3412 and 1.3500 remain active while Cable is above 1.2800.”

ING is refusing to make medium-term forecasts until the election outcome is known.

Looking beyond Fed rate cuts ING looks at potential market drivers; “That next big thing is undoubtedly the US presidential election in November. Given the power invested in the executive branch and what it can mean for trade and foreign policy, the outcome will determine whether global trade has to suffer a repeat of the 2018/19 experience.”

It added; “Equally, were the Republicans to win both branches of Congress, the dollar would be buoyed by loose fiscal/relatively tighter monetary settings.”

GBP/USD strengthened to highs near 1.3240 in immediate reaction to the US jobs data before a slide to 1.3125 as equity markets came under pressure.

US non-farm payrolls increased 142,000 for August compared with consensus forecasts of close to 165,000.

July’s increase was also revised significantly lower to 89,000 from 114,000.

The unemployment rate edged lower to 4.2% from 4.3%, in line with market expectations.

Fed Governor Waller and New York Fed President Williams both backed a cut in interest rates at the September meeting.

Waller stated that a series of rate cuts was likely to be appropriate, but he also hinted that he would back a 25 basis-point in September rather than a larger 50 basis-point move.

Following these comments, markets are now backing a smaller cut which helped the dollar, although the main impact was a slide in global equity markets which hurt the Pound.

Brian Rose, senior U.S. economist at UBS Global Wealth Management expects further dollar losses; "We've always had the view that almost regardless of other circumstances, once the Fed starts cutting rates, that the dollar would lose ground, we still have that view."

Goldman expects medium-term dollar resilience; “ultimately if the US economy and asset markets continue to deliver strong relative equity returns and a high risk-free rate to hedge portfolio risk, the Dollar’s strength will not erode quickly or easily.”

In contrast, SocGen points out the risks of capital repatriation if the US narrative changes and expects the dollar to lose ground.

It added; “the best the dollar can do as this long position unwinds, is to fall slightly/slowly, rather than faster/further.”

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TAGS: Pound Dollar Forecasts