– Written by
David Woodsmith
STORY LINK Pound Sterling to Dollar Forecast: GBP Battles Higher US Interest Rate Expectations
The Pound to Dollar exchange rate (GBP/USD) has continued to show resilience, holding around the 1.3400 level despite a stronger US inflation backdrop and persistent expectations that the Federal Reserve could keep policy tighter for longer. While the dollar remains supported by rising real yields, Sterling has so far resisted a deeper correction, leaving markets questioning whether the recent recovery can extend further.
GBP/USD Forecasts: Can Pound Sterling Extend the Recovery?
The Pound to Dollar (GBP/USD) exchange rate has again been resilient on Tuesday and traded around 1.3400 as the dollar was unable to make further headway.
UoB noted strong resistance just above 1.3400 and added; “Despite the advance, GBP has not gained much momentum. Today, we expect GBP to trade in a range, most likely between 1.3330 and 1.3400.”
Scotiabank expects firm support on any dips towards 1.3300 and added; “Gains through 1.3415 would add to short-term momentum and point to the pound gaining towards 1.3475.”
Equity markets have lost further ground on Wednesday, although the overall impact of Middle East tensions has been limited with Brent crude trading around $92.0 p/b.
The Pound could still be vulnerable if there is a sustained slide in risk conditions and a global retreat from carry trades.
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MUFG commented; “At the same time, the recent pick-up in US yields and stronger US dollar has created a more challenging backdrop for carry trades in the near-term.”
Nomura head of G10 FX strategy Dominic Bunning commented; “Even with the kind of re-upping of some of the tensions in the short term, actually the overall sentiment that we see more broadly is that we’re still closer to some kind of deal or agreement than further away.”
He added; “At some point there’s certainly a sense that we’ll need to see a bit of a breakout from this kind of holding pattern.”
The bank considers that pressure for higher US interest rates could be the trigger for such a move.
US consumer prices increased 0.5% for May with the year-on-year inflation rate increasing to 4.2% from 3.8% which was in line with consensus forecasts. Core prices increased 0.2% compared with expectations of a 0.3% increase, although the annual rate met expectations with an increase to 2.9% from 2.8%.
According to ING; “the view that the Fed will react to this inflation shock has been central to the dollar’s recovery over the last month.”
The bank added; “US real interest rates (we look at two-year USD swap rates against the zero-coupon inflation swap) have risen 60bp over the last six weeks.”
Gold has remained under pressure with a slide to 10-week lows.
ING added; “The rise in real rates has pressured last year’s dollar debasement trade, which had assumed that a captured Fed would do the bidding of the White House. The rise in real rates has punished popular debasement trade targets such as gold, bitcoin and the Swiss franc.”
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TAGS: Pound Dollar Forecasts
