Pound to Dollar Exchange Rate Forecast: Big Moves Ahead, Fed and BoE Decision Time

September 15, 2024 - Written by David Woodsmith

STORY LINK Pound to Dollar Exchange Rate Forecast: Big Moves Ahead, Fed and BoE Decision Time

Barclays expects that the Pound to Dollar (GBP/USD) exchange rate will strengthen to 1.35 in the second quarter of 2025 due to Pound strength.

Goldman Sachs, however, expects GBP/USD will weaken to 1.27 on a 6-month view due to dollar resilience.

GBP/USD dipped to test 1.30 during the week as the dollar regained ground before rallying to 1.3150 as the US currency came under renewed pressure.

Federal Reserve expectations tended to dominate during the week ahead of this week’s decisions from the Fed and Bank of England.

Barclays maintains a positive Pound stance; “We continue to view the pound as a likely outperformer in the G10. Demand resilience has been in evidence across recent data releases, supporting the case for a slow and relatively shallow cutting cycle by the MPC.”

Goldman Sachs expects medium-term dollar resilience; “Overall, we continue to believe that Dollar strength will not erode quickly or easily, especially if the Fed continues to move gradually as it currently looks set to do.”

The headline US consumer inflation rate declined to 2.5% from 2.9% and the lowest reading since March 2021.

Core prices, however, increased 0.3% on the month compared with expectations of a 0.2% increase with the year-on-year rate holding at 3.2%.

Following the data, markets were convinced that the Fed would opt for a 25 basis-point cut at this month’s meeting.

The dollar rallied, but there was a fresh shift in expectations late in the week with the chances on a larger 50 basis-point cut jumping to near 50% and the dollar came under renewed pressure.

MUFG expects the Fed will lower its inflation forecasts and added; “As a result the August CPI report does not significantly alter our outlook for a weaker US dollar. We still expect the weakening US labour market to encourage the Fed to speed up rate cuts later this year.”

As far as the Pound is concerned, the Bank of England (BoE) is expected to hold rates steady at 5.00% at this month’s meeting with a potential cut in November.

At this stage, therefore, markets expect that the Federal Reserve will be more aggressive than the BoE in cutting rates.

HSBC is less convinced over the call; “Our economists believe the totality of the data, to borrow a Fed phrase, makes the outcome rather more uncertain than this. In our opinion, the market is over-pricing near-term Fed easing, and under-pricing BoE rate cut risks for GBP-USD.”

MUFG expects the BoE will turn; “We do not expect the BoE to cut rates again until the November MPC meeting, but there is an increasing likelihood that the BoE could deliver back-to-back cuts in November and December that could trigger some reversal of pound strength if the BoE shifts to a faster pace of cuts later this year.”

Nomura is wary over the extent of long positions in the market; “GBP/USD may start to find the air thinner above 1.32 if the market starts to interpret weakening US data as negative for risk assets.

It does expect the Pound will perform well on the crosses.

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TAGS: Pound Dollar Forecasts