Pound to Dollar Forecast: High Yields Support GBP but Risks Build

– Written by


Frank Davies

STORY LINK Pound to Dollar Forecast: High Yields Support GBP but Risks Build

The Pound to Dollar exchange rate (GBP/USD) has recovered to one-week highs around 1.3300 as another rise in UK yields supported Sterling while the Dollar struggled to extend its recent advance.

The British Pound’s yield advantage remains an important source of support, although markets may be vulnerable to a reversal if aggressive Bank of England rate-hike expectations are scaled back.

GBP/USD Forecasts: 1-Week Highs

The Pound to Dollar (GBP/USD) exchange rate found support above 1.3200 on Tuesday and rallied to highs at 1.3300 on Wednesday before trading around 1.3275.

The Pound secured net gains in global markets amid a further increase in yields while the dollar was unable to make further headway.

According to UoB; “a break above 1.3280 (‘strong resistance’ level) would indicate that the weakness in GBP has come to an end.”

There is still a risk that the jump in UK yields will trigger economic fears and Pound losses.

If the attack fails, UoB did add; “a break and a daily close below 1.3200 could pave the way for a move to 1.3140.”

Bank of England policy and expectations will remain a key element. MPC member Taylor maintained a dovish stance on Tuesday, maintaining his doubts whether the conditions justified a rate hike, especially with a lack of second-round inflation effects.

Markets, however, are pricing in over an 80% chance that the BoE will hike rates in November.

Any shift in expectations and developments in energy prices could be key factors for the Pound.

BNP Paribas senior fixed income portfolio manager Nicolas Trindade commented; “You can see here very clearly a market that is overly hawkish. If we get a resolution by (November), the BoE may decide to stay on hold, but if it doesn’t happen, then they’ll be pushed to hike because the ECB has hiked, the Fed has hiked, the BOJ has hiked and they may feel a bit of pressure to do it.”

There were relatively dovish comments from New York Fed President Williams which dampened expectations of two further Fed rate hikes this year.

According to MUFG; “He stated clearly that “with the policy action we took at our September meeting, there is no need for urgency, and we have time to gather more information”. He believes that “if the economy evolves in a manner broadly consistent with my forecast, one further upward adjustment of the federal funds target range may be appropriate late this year to support a timelier return of inflation to target”.

It added; “The comments will keep alive market expectations for at least more rate hikes in the current tightening cycle, although we still believe that market pricing for almost four more hikes in the year ahead is excessive.”

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TAGS: Pound Dollar Forecasts