The Pound to Dollar (GBP/USD) exchange rate found support below 1.32 during the first week of April and has rallied strongly to highs around 1.3580 as the dollar has lost ground while the Pound has been resilient in global markets.
Scotiabank notes the potential for short-term volatility, especially given the Middle East situation, but the bank forecasts GBP/USD gains to 1.40 by the end of 2026.
The dollar could still gain net short-term support from the Iran war and the bank also notes that there is little case for the Federal Reserve to cut interest rates in the short term which will underpin yields.
Nevertheless, Scotiabank notes that the dollar performance has been uninspiring which suggests an underlying bias for selling.
Over the medium term, the bank also considers that there will be diversification away from US assets which will sap currency support. It also expects that the Fed will eventually cut rates which will encourage an increase in hedging ratios and increase downward pressure on the US currency.
As far as the UK is concerned, the bank considers that there are significant Pound risks associated with the May local elections, increasing the risk of short-term losses.
