GBPUSD Forecast Highlights
- Sterling has performed well against the USD over the summer
- GBPUSD broke through the psychological 1.300 barrier and traded at its highest level since 1Q2022
- The exchange rate is unwinding its near-term overbought technicals and is now attempting to affirm 1.300 as support
How has the Pound performed against the Dollar recently?
The summer of 2024 proved to be a positive one for Pound Sterling. Against the Dollar, in particular, Sterling managed to break north of the 1.300 barrier. GBPUSD‘s multi-month bull run appears to have established a near-term peak near 1.330 (see below).
What caused GBPUSD rate to sustain such a rally? One reason is a (gradual) revision in the British economic outlook to a less bearish one. In the August’s monetary report, for example, the Bank of England commentedthat UK’s economic “growth in the first half of the year had been stronger than expected at the time of the May Report.”In other words, the negative sentiment surrounding Sterling was slightly overdone. Prices are adjusting to new (more bullish) expectations.
That reason aside, there is another factor at play: a sudden fall in the value of the US dollar. The recent stampede out of the greenback was caused by a new adjustment in the US monetary policy. The Fed, under the leadership of Powell, is now firmly tilting towards actual rate cuts.
In the recent Jackson Hole symposium, the Fed chair assessed that the “upside risks to inflation have diminished. And the downside risks to employment have increased.” As such, he announced that the “time has come for policy to adjust.” Based on this market-moving statement, the market is building up expectations that a rate cut in the forthcoming FOMC meeting on 17/18th are likely. Lower interest rates tend to reduce the attractiveness of a currency, when holding all other factors constant.
The chart below shows the recent downward trend of the US Dollar Index.The index declined nearly five points from 106 (a significant move for the index) and currently rests at the lower side of the multi-year range.Chartwise, there is some technical support near 100. This may limit USD’s downsidefor the time being. Whether this floor is strong enough to hold the dollar is an open question.
Is it a good time to buy US Dollars with pounds?
Given that Sterling is now sitting at a relatively high point against the Dollar (based on its 2-year range), it may not be a bad time to exchange more US Dollars, especially as the rate is still trading above 1.300.
Remember that GBP has been rallying against USD for some time. A little correction here and there is perfectly normal. The FX market remains volatile. If you need the dollars now, perhaps buy a little more at the current rate.
Of course, GBPUSD may resume its rally into 1.330-1.350. It is a perfectly reasonable choice to wait further before buying dollars. But there is risk in waiting, as the rate may stay in a sideways trend longer than anticipated.
Will the pound get stronger against the USD for the rest of 2024?
The outlook for the rest of the year is hard to predict, even for top policymakers. On rate cuts, the Fed chair Powell himself admits that the path is fairly dynamic. “The direction of travel isclear,”he spoke during the Jackson Hole gathering, but“the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
Against the backdrop of an increasingly volatile economic outlook, there are a few factors worth watching:
- US economic strength – Will the the US economy weaken into a recession? A rapid weakening US economy will tip the global system into a cyclical downturn.
- Wobbly equity markets – A further deterioration of the tech sector will result in a negative wealth effect and this may further erode consumer confidence.
In early August, the stock market went into a two-day tailspin because of a rapid unwinding of the ‘Yen Carry’ trade. This triggered a tsunami of stop losses and raised fears of a recession. While prices have rebounded somewhat, investors are no longer sure if a period of plain sailing lies ahead despite the rate cuts promise. Oil prices, for example, have slumped below $70 as the economic outlook darkens.
Look at Nasdaq’s chart below. The uptrend appears toppy and vulnerable to a further decline after encountering selling pressure near 500.
But what has all this got to do with GBPUSD? For one, when risk sentiment turns sour, investors tend to seek safety in the US dollar. Whether this historical pattern will repeat again in the future remain to be seen. But this trend is worth remembering. Second, the ‘leash effect’ from US will batter the UK economy and drag Sterling lower. Taken together, it is not a ‘sure thing’ that the USD will continue its summer depreciation. GBPUSD’s advance may even start to taper off as we head into the last quarter of 2024.
What is the GBPUSD forecast in weeks, months, and years?
GBPUSD’s strong showing this summer has taken the market by some surprise. In early July, most forecasts centred around 1.275. Now, it is closer to 1.300 (see below).
More often than not, FX forecasts are led by market trends. And market trends are fickle. They can change direction suddenly. Overshooting is another frequently seen pattern in financial markets.
So what should we make of GBPUSD’s trend? For now, the rate is trying to stay above 1.300. A test of that psychological level as support looms – as prices unwind the recently accumulated overbought technicals. Overall, the market is expecting a dip below this level into the vicinity around 1.290.
Source: fxstreet.com (Sep 2024)
