– Written by
David Woodsmith
STORY LINK Pound to Dollar Week Ahead Forecast: UK Budget, Bond Yields Put GBP on Alert
The Pound to Dollar exchange rate (GBP/USD) has remained under pressure near 1.3200 as elevated bond yields and concerns over the UK’s October Budget continue to weigh on Sterling.
The Dollar’s recent rally is showing signs of losing momentum, however, with markets scaling back expectations of an October Federal Reserve hike and UBS warning that the US currency has become increasingly overbought.
GBP/USD Forecasts: Watching the bond yields
Morgan Stanley sees the risk of a Pound to Dollar (GBP/USd) exchange rate slide to 1.2850 amid a strong dollar and spasm of fear surrounding the Pound fundamentals.
UBS, however, has a 12-month GBP/USD forecast of 1.41 as the dollar loses ground and the Pound holds firm.
GBP/USD maintained a heavy tone during the week, but did find support below the 1.32 level.
Risk conditions, interest rate expectations and bond yields will be key short-term elements.
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Nomura head of G10 FX strategy Dominic Bunning is doubtful that the dollar can make further headway; “We’ve been able to have that long-dollar view on for a few weeks now. It’s worked quite nicely. But I think there’s an element of momentum starting to slow here.”
There has been a shift in market expectations with traders cutting the potential for a further Fed rate hike at the October meeting to below 20%.
Markets, however, are backing around an 85% chance of a move in December.
Political and economic developments will be watched very closely over the next few weeks.
Nomura’s Bunning added; “If we get any sign of improvement in the Middle East (situation) going into the midterms, or further signs that US data is softening that could also be something that weighs on quite elevated rate expectations in the year ahead.
According to UBS; “Most importantly, positioning and options market indicators suggest the USD has become increasingly overbought.” It added; “Some of the key drivers of USD strength may prove temporary.”
The near-term focus will shift to the budget due to be presented on October 28th.
Morgan Stanley commented; “With so many medium-term decisions yet to be made, a challenging tax-hiking arithmetic and relatively benign expectations from market participants around this Budget we see more pronounced downside than upside risks regarding its delivery.”
As far as monetary policy is concerned, BoE chief economist Pill and MPC member Greene are on the hawkish end of the spectrum and their comments this week clearly indicate that they will continue to push for a rate hike at the November meeting.
The comments from key centrists such as Governor Bailey were limited, but markets are now pricing in around an 80% chance of a rate hike at the November meeting.
Commerzbank is backing two rate hikes; “Until now, we had not expected the BoE to hike rates again. Recent developments, however, have led us to conclude that a November rate hike is now more likely than not. Moreover, we do not expect it to be a one-off move. We therefore anticipate another hike in February, taking Bank Rate to 4.25%.”
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TAGS: Pound Dollar Forecasts
