Pound to Dollar Forecast for Week Ahead: Sell to 1.1750?

January 12, 2025 - Written by Tim Boyer

STORY LINK Pound to Dollar Forecast for Week Ahead: Sell to 1.1750?

MUFG recommends selling the Pound to Dollar (GBP/USD) exchange rate with a target of 1.1750.

There was a slide in UK bonds during the week with a jump in yields as the 10-year yield hit a 16-year high while the 30-year yield hit the highest level since 1998.

Upward pressure on US yields contributed to the selling of US bonds.

There were fears that the government's economic strategy would unravel with pressure for fiscal tightening. There were fears over a negative impact on UK growth.

This combination undermined confidence in the pound, resulting in losses across all major currencies.

GBP/USD posted sharp losses with 14-month lows just below 1.2200.

MUFG expects that ongoing pressure on the UK bond market will work in tandem with further Pound selling; “If Gilt yields continue to push higher, adding to the UK government’s funding costs, doubts will continue to build over fiscal plans triggering a further loss of confidence in the GBP.”

It added, “We are not expecting the BoE or government to step up and support the Gilt market in the near-term, leaving it vulnerable to further near-term weakness.”

MUFG also noted the negative implications of higher energy prices.

US developments have added to pressure on global bond markets and contributed to upward pressure on UK bond yields, a twin negative for GBP/USD.

US non-farm payrolls increased 256,000 for December compared with consensus forecasts of around 165,000, while the November increase was revised slightly lower to 212,000 from the flash reading of 227,000.

The unemployment rate declined to 4.1% from 4.2% and compared with expectations of no change.

The University of Michigan consumer confidence data also recorded an increase in 5-year inflation expectations to a 16-year high.

Following the data, markets ruled out the potential for a Fed rate cut in January and considered that the chances of a March cut had dipped to around 25%.

Markets also considered that the Fed may only cut rates once during the year.

Bank of America, for example, now expects that there will not be any further rate cuts this year.

The US 10-year bond yield increased to above 4.75%, the highest level since October 2023, maintaining pressure on the UK bond market.

Seema Shah, chief global strategist at Principal Asset Management, noted the adverse global implications; “The important payroll beat will be good news for the U.S. economy and the US dollar, unwelcome news for equities as they seek interest rate relief, and punishing news for global bond markets, particularly UK gilts.”

She added, “For global bonds, the strength of the U.S. jobs report just adds to their challenges. The peak for yields has not yet been reached, suggesting additional stresses that several markets, especially the UK, can ill afford.”

Rabobank expressed concerns over the UK fundamentals; “the UK is a price taker in sovereign debt markets, particularly exposed to the whims of foreign/nonbank investors because of its fiscal deficit and its current account deficit.”

The bank’s economists expect that the government will have to announce further fiscal tightening in the March budget.

It added, “If so, that would work out disinflationary instead of inflationary, and that would give the BoE enough policy space to at least stick to their theme of gradualism.”

It expects quarterly interest rate cuts by the BoE.

SocGen added, “GBP/USD is likely to remain under pressure due to US economic strength and a widening US-Europe/Asia rate differential.”

Capital Economics chief UK economist Paul Dales put the developments in context; “This week’s leap in gilt yields creates more problems for the Chancellor and is an extra headwind for the economy. But it is not a crisis and the cause mostly originates overseas rather than being home-grown.”

Bank of America also noted the risk of dollar logs being cut; “A USD reversal, if it happens, could be amplified by trend follower unwinds.”

It did, however, add, “Lingering fiscal and inflation concerns, coupled with negative sentiment, suggest caution before re-entering GBP longs.”

UBS will still look to buy Pound dips; “While we do not expect significant near-term weakness, we think that investors should use further strength in the dollar to diversify into other preferred currencies, including the British pound and Australian dollar.”

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