GBP forecast: Cable heads for worst month since mini-budget

Pound once again under pressure from strong dollar, recession risk

The pound to dollar exchange rate (GBP/USD) slid below the $1.22 level, hitting its lowest point since mid-March and heading for its weakest monthly performance in a year. The drop came as investors processed disappointing economic data and the Bank of England's decision to halt its rate hike cycle last week.

Following its remarkable 5% surge in the first half of this year, which marked the strongest performance among major developed currencies against the U.S. dollar, the pound is now falling behind once more.

Concerns over sluggish growth prospects, persistent Brexit-related uncertainties, doubts surrounding long-term debt sustainability, and stubborn inflation issues have all made investors wary of holding U.K. assets.

“For most of this year the market was thinking the UK had avoided recession and that rates there would be going up a lot more, providing an incentive to buy the pound,” Jane Foley, head of FX strategy at Rabobank, said in a comment to the FT. “That’s no longer the case.”

The S&P Global Purchasing Managers' Index (PMI) report, released on Friday, revealed that business activity in the UK contracted at the steepest rate in over two and a half years in September, largely due to reduced demand caused by rising living costs and increased borrowing expenses. Excluding pandemic-related disruptions, this decline marked the most significant drop in activity since March 2009.

On the policy front, the Bank of England kept interest rates unchanged at its September meeting but signaled its commitment to maintaining elevated interest rates for a longer period of time — the policy stance, shared by the U.S. Federal Reserve (Fed) and the European Central Bank (ECB), is commonly referred to as “higher for longer”.

“Sterling’s had a bad month because the UK’s had the biggest drop in peak rate expectations compared with other major economies,” said Kit Juckes, a macro strategist at Société Générale, told the FT. “Rate support for the currency has vanished.”

In November, U.K. policymakers are expected to maintain the Bank Rate at 5.25%, considering indications of easing inflation and a more relaxed labor market. Markets are currently pricing in a 50% probability that there will be no further increases from the current 5.25% rate.

GBPUSD news: Pound to dollar rate pressured by USD

The GBP/USD currency pair — often called “cable” in forex markets — is also facing pressure from renewed strength in the U.S. dollar (USDX), bolstered by the Federal Reserve’s commitment to another rate hike before the end of the year. On Monday, two Fed officials, Chicago Fed President Austan Goolsbee and Minneapolis Fed President Neel Kashkari, both reiterated the central bank’s intention to keep interest rates “higher for longer".

Long-term U.S. Treasury bond yields have soared on the news. Ten-year U.S. Treasury yields surged by an impressive 25 basis points within a single week, reaching a new 16-year high of 4.5660% early on Tuesday. According to Deutsche Bank, this level holds historical significance, considering that the average 10-year yield dating back to 1799 has been around 4.50%.

Thirty-year U.S. Treasury bond yields saw an increase of over 30 basis points in just one week, soaring to a 12-year high of 4.6840%.

Private sector bankers are starting to brace for the worst, with JP Morgan chief Jamie Dimon reported overnight as warning:

Markets are also watching news surrounding the possibility of a U.S. government shutdown. A conflict between House conservatives and Speaker Kevin McCarthy, who previously negotiated a spending agreement with President Joe Biden, appears to be growing more difficult to resolve.

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Pound to dollar forecast: Analysts bearish on cable, see short-term USD strength

Scotiabank Chief Currency Strategist Shaun Osborne said the dollar was likely to exhibit short-term strength, but was prone to a downswing on weak economic data or a U.S. government shutdown:

As the dollar probed November 2022 highs after its tenth successive weekly gain, Kit Juckes, Chief Global FX strategist at Societe Generale, weighed in his take on the greenback’s strength in his USD forecast:

Turning to the GBP/USD pair, Scotiabank’s Shaun Osborne said cable could be oversold in the short run:

A similar technical perspective from economists at Societe Generale, quoted by the FXStreet Insights Team, was bearish on GBP/USD, saying a meaningful uptrend for pound to dollar rate could only be achieved if the rate rose back up to $1.2430:

In their latest FX Snapshot on September 25, analysts at Citibank Hong Kong said:

Citi’s 3-month pound to dollar forecast was surprisingly bullish, considering the current rate of $1.2183, placing the GBP/USD exchange rate at a potential average of $1.26. The 6-to-12-month forecast, however, was bearish, suggesting that the pound to dollar rate could drop to $1.19, according to the bank.

The bank's long-term cable outlook was bullish, projecting the GBP/USD pair to recover and trade at a potential average of $1.40.

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.