Pound to Dollar Week Ahead Forecast: 19-Year High Gilt Yields Put GBP on Alert

– Written by


David Woodsmith

STORY LINK Pound to Dollar Week Ahead Forecast: 19-Year High Gilt Yields Put GBP on Alert

The Pound to Dollar exchange rate (GBP/USD) has settled just above 1.3500 after hitting three-week lows as surging UK and US bond yields increased concerns over fiscal sustainability on both sides of the Atlantic.

Pound Sterling faces particular scrutiny ahead of the October Budget, while stronger US employment data has revived expectations that the Federal Reserve could raise interest rates this month.

GBP/USD Forecasts: Bond market warnings

RBC Capital Markets forecasts that the Pound to Dollar (GBP/USD exchange rate will slide to 1.27 by the end of this year.

MUFG, however, is backing GBP/USD gains to 1.38 by the first quarter of 2027.

GBP/USD dipped to 3-week lows below 1.35 during the week before settling just above this level.

The dollar dipped after Fed Governor Waller indicated that he might not push for a rate hike this month, but then gained some support after a stronger than expected jobs report with an increase of 162,000 in non-farm payrolls for August.

Bond markets will remain a key element. The US 10-year bond yield spiked to 20-month highs above 4.80% while the UK 10-year yield hit an 19-year high above 5.20%, although there was a limited retreat late in the week.

Higher yields will increase fiscal-policy concerns and there is the risk of a vicious cycle as fiscal fears put further upward pressure on yields.

RBC Capital Markets commented on fiscal risks; “The key test for sterling will be the UK Budget on the 28th October because the Chancellor will have to lay out their full economic agenda including costings and the DMO will publish issuance projections.

It added; “Because Starmer was kicked out as Prime Minister largely for not being ambitious enough on fiscal policy, we see risks of increased borrowing and a Budget that is less well received by markets.”

Fed policy will inevitably be extremely important for currency markets.

ING has shifted its stance and is now leaning towards a rate hike; “We don’t think anyone on the FOMC is hostile to the idea of a rate hike and, as such, we are now in an environment where it seems as though the Fed’s position is to hike rates, unless the data justifies a pause, versus the previous position of holding rates steady unless the data justifies a hike. This suggests a 16 September rate hike is now the most probable outcome.”

Wells Fargo’s global head of FX strategy Erik Nelson noted uncertainty over Warsh’s position; “We continue to do this ping-pong of who is Kevin Warsh? A hawk? A dove? We’ve seen both extremes of that trade. People are projecting their views of who he is…because he’s said nothing — well, almost nothing.”

Citi head of G10 FX Dan Tobon expects a dovish stance and fragile dollar, but noted risks surrounding the Iran conflict

He added; “But if the conflict becomes a bigger factor tomorrow and for the next few months the dollar will go up and we’re going to be wrong.”

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TAGS: Pound Dollar Forecasts