Sterling gains on dovish Fed comments, continues rebound vs. dollar 

The British pound is mounting what appears to be a recovery against the U.S. dollar (GBP/USD), climbing back above the $1.22 level, following its dip to nearly a seven-month low at $1.2035 on October 4th. 

The pound’s rise can largely be attributed to remarks from two Fed officials on Monday suggesting that increases in long-term yields could obviate the necessity for additional rate hikes. The comments also led to a sharp drop in U.S. bond yields on Tuesday as trading reopened following the Columbus Day holiday.  

The International Monetary Fund (IMF) also adjusted its GDP projection for the United Kingdom in 2024, revising it down to 0.6% from the earlier estimate of 1.0%, as officials believe the Bank of England will need to maintain elevated interest rates to combat persistent inflation and address the repercussions of last year's energy price surge.  

“The general perspective is for fairly subdued growth and falling momentum,” said Pierre-Olivier Gourinchas, the IMF’s economic counsellor, at a press conference in Marrakech, Morocco, to launch the World Economic Outlook (WEO). 

“The labour market is cooling but inflation remains quite persistent. Monetary policy will need to remain tight for a little while longer and into 2024.” 

The IMF estimates the UK will be the slowest growing economy in the G7 club of advanced nations next year. 

GBP/USD forecast: Analysts see cable test 1.20 in October 

Jane Foley, head of FX strategy at Rabobank, told Reuters the latest move higher in cable — the nickname for the pound to dollar rate used in forex markets — was largely a dollar-driven story: 

"The dollar has been taking a bit of a breather, as despite the blowout payrolls number on Friday there was enough in the report to keep on track the view that inflation pressures in the U.S. are moderating," she said. 

"Yesterday there were a lot of other factors coming into the market, given the events over the weekend in Israel, but by the end of the U.S. session and into today the market moved to recover the initial risk-off move, and that allowed FX markets to think back to U.S. payrolls number on Friday." 

In his pound to dollar forecast, FXStreet analyst Haresh Menghani, wrote that it would be “prudent to wait for strong follow-through buying” before confirming a higher trajectory for cable. He also mentioned that dovish comments from Fed officials had outweighed risk-off sentiments following the Hamas attack on Israel:  

“Meanwhile, the initial reaction to military clashes between Israel and the Palestinian Islamist group Hamas turns out to be short-lived in the wake of a slight dovish shift in Fed officials' view. This is evident from a generally positive tone around the equity markets and further undermines the safe-haven buck. That said, expectations that the Bank of England (BoE) will maintain the status quo in November should cap the upside for the GBP/USD pair. 

In fact, the UK central bank surprisingly paused its rate-hiking cycle earlier in September and provided little hints of its intention to raise rates. This, in turn, makes it prudent to wait for strong follow-through buying before confirming that the GBP/USD pair has formed a near-term bottom and positioning for any meaningful appreciating move. Moving ahead, there isn't any relevant market-moving economic data due for release from the UK or the US on Tuesday.” 

Dutch bank ING offered an updated GBP/USD forecast in its latest edition of its FX Talking bundle on Monday, October 9. Global Head of Markets Chris Turner and FX Strategist Francesco Pesole projected that the BoE’s cycle would likely be over at the next meeting: 

“The Bank of England surprised some by leaving the Bank Rate unchanged at 5.25% in September. The vote was close however: 5-4. Barring some big upside surprises to the inflation and wage data published on October 17/18th, we think policy will be left unchanged at the Nov 2nd meeting and the cycle will be over. 

Investors still price 18bp of further BoE tightening, which suggests sterling can drop a little when this is priced out. But GBP/USD should find support at the lower end of this 1.20-1.30 range.” 

ING’s one-month pound to dollar forecast saw the pair trading at a potential average of $1.21, before rising to $1.22 in three months’ time and $1.23 by April 2024. 

At the time of writing, the GBP/USD pair was trading at $1.2255, up 0.13% on the day, as per MarketWatch data. 

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