– Written by
David Woodsmith
STORY LINK Pound Sterling to Dollar Forecast: GBP Re-Tests 5-Week Lows Ahead of Fed
The Pound to Dollar exchange rate (GBP/USD) has re-tested five-week lows around 1.3465 as fragile risk appetite, elevated oil prices and US Treasury yields above 5% continue to underpin the Dollar.
Attention is now firmly on Wednesday’s Federal Reserve decision, with a 25-basis-point hike heavily priced and investors looking for guidance on whether it marks the start of a broader US tightening cycle.
GBP/USD Forecasts: Re-Testing 5-Week Lows
The dollar posted net gains on Monday and maintained a form tone on Tuesday. Oil prices remain close to 4-month highs while the US 10-year yield is trading just above 5.00% while risk appetite has been more fragile ahead of the US Federal Reserve rate decision on Wednesday.
According to ING “From an FX perspective, we see it as a positive event for the dollar.”
The Pound to Dollar (GBP/USD) exchange rate re-tested 5-week lows around 1.3465 before trading around 1.3485 as the Pound continued to find support on dips.
According to UoB; “While we would have preferred a more decisive close below 1.3495, the price action points to further GBP weakness. That said, the next major support at 1.3410 may not come into view so soon.”
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Scotiabank commented; “The trend from June remains bullish and would only be invalidated on a break and extension below 1.34.”
The Fed will announce its latest interest rate decision with markets pricing in over a 90% chance that rates will be increased by 25 basis points to 4.00%.
Markets also expect a series of rate hikes. The bond market will remain a key element given the extent of recent selling.
MUFG noted the shift in expectations; “The US rate market now expects the Fed to deliver almost 100bps of hikes in the year ahead, fully reversing last year’s rate cuts that totalled 75bps.”
It added; “The hawkish repricing has also helped to lift yields at the long-end of the curve with the 10-year US Treasury yield rising above 5.0% yesterday and hitting the highest level since the middle of 2007 in the run up to the Global Financial Crisis.”
ING commented on the bond market and potential US action to curb pressure; “For now, Scott Bessent may be willing to let a largely oil-fuelled bond rout run its course, perhaps counting on Wednesday’s likely Fed hike to at least keep inflation expectations from breaking loose.”
Domestically, there was no major impact from the latest labour-market report. There were declines in payrolls for July and August while underlying earnings growth remained at 3.5%.
According to Berenberg senior UK economist Andrew Wishart; “Much looser labour market conditions than during the last major energy price shock in 2022 make a new price-wage spiral highly unlikely,”, at Berenberg.”
The consensus is that the Bank of England will hold interest rates at 3.75%, with hawkish guidance and Berenberg is backing that view.
The bank did add; “Nonetheless, we expect the BoE to signal that it will hike in November unless energy prices fall back, to guard against the risk of persistent high inflation.”
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TAGS: Pound Dollar Forecasts
