The Pound to Dollar (GBP/USD) exchange rate has retreated sharply this week with a slide to 11-week lows below 1.3300. The dollar has gained net support from a slide in risk appetite amid US attacks on Iran while the Pound has been hurt by the slide in equities.
MUFG sees scope for further dollar gains in the near term as the dollar benefits from Middle East fears and this could push GBP/USD below 1.3100. It does, however, expect a recovery to 1.37 on a 12-month view.
MUFG notes increased uncertainty over Fed policy, especially with Fed Chair nominee Warsh due to take office in May. At this stage, the bank is still backing three rate cuts by November which will sap dollar yield support.
Looking at the Bank of England, MUFG expects that the next rate cut will be delayed until April from March due to Middle East uncertainty and is backing one further cut with rates then held at 3.25%.
The bank does see scope for increased confidence in the fiscal policy outlook which will help underpin Pound sentiment in global markets. It notes that Iran fears could also delay any leadership challenge to Prime Minister Starmer.
