– Written by
David Woodsmith
STORY LINK Pound-to-Dollar Weekly Forecast: USD Retreat Pushes GBP to Three-Month Best
The Pound to Dollar exchange rate (GBP/USD) has climbed to three-month highs above 1.3550 as resilient UK growth, attractive yields and fading expectations of an imminent Federal Reserve rate hike combine to support Sterling.
With US inflation continuing to moderate and retail sales weakening, markets are increasingly questioning whether the Fed will tighten at all in September.
GBP/USD Forecasts: Fed rethink?
SocGen sees scope for the Pound to Dollar (GBP/USD) exchange rate to strengthen to the 1.38 area.
MUFG has a 12-month GBP/USD target of 1.36 with the Pound and dollar both struggling over the medium term.
GBP/USD strengthened to 3-month highs just above 1.3550 during the week. The Pound was underpinned by high yields while the dollar was hampered by reduced speculation of a near-term Federal Reserve rate hike.
There is near-term resistance close to 1.3550. SocGen commented; If the rebound extends, the May high near 1.3660 could act as an interim hurdle.
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High yields and low volatility underpinned the Pound during the week.
MUFG commented; “The pound is continuing to perform well this year. It has been the best performing major currency so far in August with cable rising back above the 1.3500. The pound has been supported by further evidence yesterday that the UK economy is proving more resilient than expected to the negative energy price shock triggered by the US-Iran conflict.”
The near-term focus will be on labour-market and inflation data releases due this week.
MUFG commented; “The soft labour market and recent downside inflation surprises have eased pressure on the BoE to hike rates in response to the energy price shock even as the UK economy has held up better than expected.”
Scotiabank is positive on the Pound outlook; “Fundamental releases have been limited, however BoE communication has remained hawkish with comments from Chief Economist Pill that have reaffirmed a call for higher rates. Risk reversals are extending their recovery and fading the premium for protection against GBP weakness, reflecting a sustained improvement in the market’s perception of (moderating) political risk.”
Fiscal policy will continue to be watched closely given underlying pressures on the spending and revenue sides of the equation.
Rabobank commented; “Burnham’s plans to ease the cost of living for the electorate still must be paid for. Speculation as to which taxes may go higher is already emerging and so too has speculation that this could have a contractionary impact on growth.”
The dollar retreated after a relatively benign inflation report with the headline rate at 3.4% and core rate at 2.5%. Retail sales also declined for July and markets were less confident that the Federal Reserve would hike rates at the September policy meeting.
CIBC commented; “With core inflation in line with consensus, and inflation continue to decelerate on an annual basis, this should bring some comfort to some members of FOMC and we continue to expect the Fed to hold rates in the September FOMC meeting.”
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TAGS: Pound Dollar Forecasts
