STORY LINK Pound to Dollar Rate Outlook: “Risks are Biased Towards US Dollar Losses”
The US Dollar lost some ground on Monday with strong evidence of Bank of Japan intervention to support the yen triggering a tentative wider retreat in the US currency.
The Pound to Dollar (GBP/USD) exchange rate traded just above the 1.2500 level with markets braced for very volatile trading during the week.
Bank of Japan actions and economic developments will be crucial during the week with Pound positioning ahead of next week’s Bank of England policy decision also important.
MUFG expects European currencies will be broadly resilient and noted; “In light of recent developments, it appears unlikely that the hawkish repricing of Fed policy will be sufficient to trigger a bearish break out of current trading ranges for EUR/USD and cable between 1.0500 and 1.1000, and 1.2000 and 1.3000 respectively.”
There has been a substantial shift in speculative Pound positions.
According to the latest COT data, released by the CFTC, there was a short, non-commercial Sterling position of over 26,000 contracts in the latest week compared with a long position of just over 8,500 contracts previously.
This was the largest short position since late November 2023 and the third largest short position since the beginning of 2023.
The dramatic shift seen during the week should lessen the potential for further Pound selling.
There are very important US events this week with a raft of data on the economy and labor market as well as the Federal Reserve policy decision.
According to ING; “Friday’s jobs report is the week’s biggest event – probably more important than the Fed meeting.”
It added; “We think the dollar is more likely to lose some ground because of payrolls than because of the Fed if anything.”
MUFG expects very weak data will be needed to weaken the US currency; “It would require a much weaker nonfarm payrolls report for April to challenge the hawkish repricing of Fed rate cut expectations in the week ahead.”
The bank does, however, consider that the dollar has factored in the changed outlook for interest rates. It added; “A rate cut is not fully priced in now in the US until November compared to by July in the euro-zone and September in the UK. It should help to limit the room to price in further policy divergence in the near-term unless the US rate market really starts to seriously question whether the Fed will cut rates at all this year.”
According to Danske Bank, the risks are biased towards dollar losses; “The crowded USD long trade suggests that US data outcomes are likely skewed towards very strong numbers to drive further substantial gains for the USD. If economic data surprises negatively in the near term, this could lead to short-term weakness in the USD. We believe there is downside risk to US yields.”
Nordea noted that interest rates might have to remain elevated to help bring inflation under control.
It added; “That is bad news for bonds and it might become bad news for stocks that reflect a strong economy.”
This combination would also have important currency-market implications with increased dollar volatility.
According to Rabobank; “the CPI and PCE inflation data for March have shattered Powell’s dream of starting the cutting cycle in June and making three cuts of 25 bps each before the end of the year.”
The bank is also concerned that the economy is facing stagflation, a combination of stubborn inflation and weakening growth.
It added; “the net result of our stagflationary view is that we still expect the first rate cut in September and the second in December.”
Such a scenario would tend to weaken the dollar.
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TAGS: Pound Dollar Forecasts
