STORY LINK Pound to Dollar Week Ahead Outlook: Equity Markets Dominate
After a hesitant stance, CIBC expects that the Pound to Dollar (GBP/USD) exchange rate will strengthen to 1.34 at the end of 2025.
In contrast, ING expects GBP/USD will be trapped at 1.25 at the end of next year as the Bank of England cuts interest rates more aggressively.
Risk appetite dipped sharply early in the week as fears over a US slide into recession intensified.
US yields dipped sharply amid expectations of an aggressive Fed policy to cut interest rates.
Although lower yields undermined the dollar, the Pound impact was offset by a slide in risk appetite.
GBP/USD posted 5-week lows at 1.2665 before a recovery to 1.2770 as equities recovered ground.
MUFG commented; “The rebound in equity markets towards the end of this week has provided some relief for the high beta G10 currencies. The New Zealand dollar, Australian dollar, Norwegian krone and the pound have been the best performing G10 currencies over the last couple of days.”
There were no major UK data releases during the week with markets waiting for the next labour market and inflation releases.
According to ING; “We think the BoE has room for two more cuts as services inflation and wage growth numbers will likely improve.”
The Federal Reserve outlook will remain a key element.
At one stage, as equity markets posted sharp losses, markets priced in 75 basis points of rate cuts in September and there was chatter of an emergency cut
Bank of America commented; “Our take is that although the weakness in manufacturing brings the Fed closer to a September cut, the bar is much higher for the Fed to cut at consecutive meetings (or by more than 25bp). For that to happen, the labor market would have to roll over. Therefore, market pricing of around 85bp of cuts this year seems overdone.”
Morgan Stanley added; “Markets are now pricing more than four cuts in 2024 with close to two in September, but we think they are overreacting. We still look for three 25bp cuts this year. Of course, a faster cutting cycle than we expect is a possibility, but current data do not support it.”
According to CIBC Pound sentiment will gradually improve; “We expect the cyclically correlated currency to benefit from rising global trends alongside hopes of a graduated uptick in foreign direct investment.”
It added; “A key constituent in Sterling’s re-rating proved to be the expectation of a period of extended political stability post Labour gaining the biggest election majority since 1997.”
Standard Chartered is also positive given that global central banks are cutting rates; “the case for further GBP weakness from here is not compelling, in our view, and may be short-lived.”
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TAGS: Pound Dollar Forecasts
