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 GBP/USD forecast

 

The British pound (GBP/USD) slid below the crucial $1.25 mark on Thursday, September 7, reaching its lowest point since early June, according to Marketwatch data. It has since bounced back and consolidated around that level, which is proving a tough resistance to crack. 
 
This decline was triggered by Bank of England (BoE) Governor Andrew Bailey's statements during his recent appearance before the UK Parliament on Wednesday. Bailey indicated that the central bank was nearing the end of its series of interest rate hikes, despite the looming possibility of further rate increases due to persistent inflationary pressures. 

"I think we are much nearer now to the top of the cycle. And I'm not therefore saying we're at the top of the cycle because we've got a meeting to come," Bailey told lawmakers on September 6. "But I think we are much nearer to it on interest rates on the basis of current evidence." 

The Consumer Price Index (CPI) fell to 6.8% in July, from 7.9% in June, as the drop in energy prices over the past year led to the smallest increase in the cost of living in the UK since February 2022. Core inflation (which excludes energy and food prices), however, has remained at 6.9% — unchanged from June — and higher than expected in a Reuters poll for a reading of 6.8%.  

In a parallel development, another member of the BoE’s Monetary Policy Committee (MPC), Swati Dhingra, voiced concerns that interest rates had already reached a level that could potentially harm the economy if raised further.  
 
"Policy is already sufficiently restrictive, and the lagged effects of further tightening pose serious risks of output volatility in order to make a small dent on inflation," Dhingra said in an annual report to parliament's Treasury Committee. 

"While each additional increase in Bank Rate intensifies the effect on currently exposed subsets of the economy – for example those rolling off fixed-rate mortgages - it takes time for the breadth of the effects to increase." 

The BoE has raised rates at each of its last 14 meetings as it grappled with the highest inflation among the world's most-developed economies. Most economists expect the BoE to raise borrowing costs again later this month, taking Bank Rate to 5.5%, and predict rates to peak at 5.75%, according to poll results cited by Sky News. 
 
In another assessment, James Smith, UK economist at Dutch bank ING, wrote yesterday that the BoE received welcome news in terms of price expectations from the corporate sector. This has added to the reassessment of the BoE tightening cycle, where the policy rate peak (still priced for next February) is now at 5.60% versus the near 6.50% levels expected just a couple of months ago. 

As of September 8, the pound to dollar exchange rate — also widely known as “cable” in forex trading — was trading at $1.248 as of 8:30 a.m. EDT. 

 

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GBP/USD forecast: Analysts mostly bullish on cable, forecasts yet to be updated 

 On September 7, ING’s Global Head of Markets Chris Turner wrote
 
“Sterling is coming under pressure against the strong dollar and marginally outperforming the pressured euro. High wage growth looks to be the primary reason for the market retaining expectations of a further 57bp of Bank of England (BoE) tightening in this cycle – making pivotal next Wednesday's release of the average earnings figures for July. Our base case is one more 25bp hike from the Bank on 21 September and then a prolonged pause.” 
 
Turner highlighted that the currency was in line for a “firm test” of the $1.25 level: 

“The manufacturing slump in the eurozone and these high energy prices suggest EUR/GBP can trade at the lower end of that 0.8500-0.8600 range into that BoE rate meeting on 21 September. GBP/USD looks more vulnerable to a firm test of 1.2500 psychological support.” 

Meanwhile, ING’s GBP/USD projection — yet to be updated — was bullish on the pair, with cable expected to trade at $1.31 in Q4 2024, before rising to $1.33 in Q1 2024 and edging even higher in Q2 2024 to $1.34. 

In his daily overview, Markets.com Chief Market Analyst Neil Wilson wrote the GBP/USD’s 200-day Simple Moving Average (SMA), 1.2425, was likely safe for the time being: 
 
“Year ahead CPI expectations down sharp to 4.8% from 5.4% in July, 3yr stickier but still this will be very welcome news for the MPC ahead of its meeting later this month. We saw sterling come down as the dollar caught bid, but so far no strong desire among bears to test the 200-day [simple moving average]. The 200-day is safe for now.” 
 
 

Pound retreats on dovish BoE remarks


 
Analysts at Citibank Hong Kong’s Wealth Management division were even more bullish on GBP/USD than ING in their most recent FX Snapshot, dated September 5: 

“GBP will likely remain a positive carry winner within G10 in the short term. But this may turn quickly once the BoE pivots dovish, with Citi analysts forecasting a recession in H1 2024 and a significantly more dovish BoE path. Questions surrounding the resilience of the UK economy beyond Q3’2023 make sterling vulnerable as market economists attach a significantly higher probability of a recession to the UK next year than the US or the euro zone.” 

Citibank Hong Kong’s GBP/USD forecast saw the pair trading at an average of $1.29 in the next 3 months, then rising to $1.30 in 6-12 months’ time. The bank’s long-term outlook for the pound to dollar rate was $1.40.  
 
In contrast to the above outlooks, UOB Group economist Lee Sue Ann and markets strategist Quek Ser Leang noted that further weakness in GBP/USD should not be ruled out in a comment cited by FXStreet: 
 
“While downward momentum has not improved much, GBP could continue to decline. That said, the major support at 1.2400 is unlikely to come under threat. In order to keep the momentum going, GBP must stay below 1.2510 (minor resistance is at 1.2490).” 
 
For the next one to three weeks, the analysts forecast the pound to dollar rate to weaken:  
 
“We continue to hold the same view as yesterday (07 Sep, spot at 1.2500). As highlighted, we continue to expect GBP to weaken. However, oversold short-term conditions could slow the pace of any further decline, and the next major support at 1.2400 might not come into view so soon. Overall, only a breach of 1.2555 (‘strong resistance’ level was at 1.2605) would suggest that the GBP weakness that started on Monday has stabilised. Looking ahead, if GBP were to break clearly below 1.2400, it could trigger a further decline towards 1.2310.” 

Danske Bank’s GBP/USD prediction was less optimistic than its counterparts at Citi, with a one-month cable forecast of $1.26, with further predictions progressively declining. The Copenhagen-based bank projected GBP/USD to trade at $1.23 in 3 months’ time, $1.20 in 6 months’ time and average $1.17 by late August 2024, according to Danske’s most recent FX Forecast Update
 
When considering foreign currency (forex) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice. 

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