Pound to Dollar Weekly Exchange Rate Outlook: Lose-Lose Sterling Scenario?

January 19, 2025 - Written by Frank Davies

STORY LINK Pound to Dollar Weekly Exchange Rate Outlook: Lose-Lose Sterling Scenario?

Foreign exchange analysts at UBS have adjusted their forecasts and now expect the Pound to Dollar exchange rate (GBPUSD) will dip below 1.20 short-term before a move back to 1.29 by year-end.

ING expects GBP/USD to remain under pressure throughout the year with an end-year forecast of 1.19.

The dollar posted fresh 2-year highs at the beginning of the week, while Pound confidence dipped sharply amid a slide in UK bonds and a jump in the 10-year yield to a 16-year high above 4.90%.

In this environment, the Pound remained under pressure,e with GBP/USD hitting 14-month lows near 1.2100.

A key driver during the week was US bond yields, and the 10-year yield declined to around 4.60% from 2023 highs near 4.80%, which triggered a limited dollar retracement.

UK yields also moderated later in the week, which helped stabilise the pound, with a GBP/USD recovery of around 1.2200.

Sterling confidence remained weak, however, amid concerns that higher yields would force further fiscal tightening.

ING commented, “While we do not think there is a sovereign crisis underway in the UK, we do think the rise in gilt yields will force a round of spending cuts from the government when it announces a spending review on 26 March. This is because the rise in gilt yields is challenging the fiscal rule of balancing the budget over a five-year horizon.”

SocGen will be watching speculative flows closely; “positioning data may show GBP shorts building, but they won’t suggest they are so extreme as to justify ‘buy GBP’ recommendations.”

It added, “Failure to defend 1.2090/1.2035 can extend the decline towards 1.1910 and projection of 1.1860.”

Weaker-than-expected inflation data, together with another weak GDP release, reinforced already strong expectations that the Bank of England would cut interest rates at the February meeting.

ING expects four rate cuts this year and that yield spreads will undermine the Pound.

HSBC still sees underlying vulnerability; “The key for GBP is whether growth can improve without pulling inflation higher. Were the data to show this happier growth/inflation mix, then structural and cyclical headaches would disappear at the same time. For now, however, GBP’s headaches remain.”

Trump’s economic agenda will inevitably be a key element in the short term with the inauguration on January 20th.

There are expectations that tariffs will be introduced very quickly, with the Administration also pushing to extend tax cuts.

ING commented, “Given Trump's policy set of tariffs, immigration controls, fiscal stimulus and regulatory relaxation - plus a strong US economy - no investor wants to stand in the way of the strong dollar juggernaut. Look for continued dollar strength and probably more central banks being forced to intervene to support their currencies.”

According to UBS, “we still think that 2025 could be a story of two halves—strength in 1H, and partial or full reversal in 2H.”

It added, “The fact that the USD is trading at multi-decade highs in strongly overvalued territory and that investor positioning is elevated underpin this narrative, in our view.”

Morgan Stanley (MS) expects the dollar will eventually decline; “While the USD has continued strengthening despite ebbing economic surprises, our team is closely monitoring US economic data and policy rhetoric to identify the right moment to re-enter short USD positions.”

The US budget and trade deficits could also have an important impact during the year.

MS added, “Moves in the DXY have been closely rated to expected interest-rate differentials, but our Strategists’ analysis suggests the DXY could also weaken if anticipated US fiscal and trade policies under-deliver.

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TAGS: Currency Predictions Pound Dollar Forecasts