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BNP Paribas expects the Pound to Dollar (GBP/USD) exchange rate to struggle in the short term, but anticipates gains to 1.35 by the end of next year. Conversely, RBC Capital Markets predicts a steady retreat to 1.23 by the end of this year, with further losses to 1.19 at the end of 2025.
Current Market Sentiment
Pound sentiment has remained firm during the week while the dollar has come under pressure. UK GDP data for May was stronger than expected with 0.4% growth after no change for April. Bank of England chief economist Pill also cast doubt on the potential for a near-term cut in interest rates.
According to Credit Agricole, “We have already noticed that foreign inflows into the UK stock market ETFs have been on the rise in recent weeks. More recently, less dovish BoE comments as well as better-than-expected UK economic data have further boosted the GBP’s relative rate appeal.”
BNP added, “The UK election outcome of a sizeable Labour majority seems positive for the GBP as it ushers in a period of political stability. We’ll also be watching the scope for UK-EU relations to improve under a Labour government as well as the possibility for growth-positive reforms and spending policies.”
Divergent Forecasts
BNP Paribas
Short-term struggle for GBP/USD.
Anticipated gains to 1.35 by the end of 2024.
Positive outlook due to political stability and potential UK-EU relations improvement under a Labour government.
RBC Capital Markets
Steady retreat to 1.23 by the end of 2023.
Further losses to 1.19 by the end of 2025.
Downside risks prevail due to constrained fiscal backdrop and potential deterioration in fiscal policy credibility.
US Inflation and Federal Reserve Policy
The latest US inflation data was weaker than expected, with the headline rate declining to 3.0% from 3.3% and below consensus forecasts of 3.1%. The core rate edged lower to 3.3% from 3.4% after a 0.1% monthly increase, marking the lowest annual increase since May 2021. This data triggered renewed expectations of a near-term Federal Reserve rate cut.
Expert Opinions
ING: “Inflation data supports the argument that the Federal Reserve can start loosening monetary policy this quarter. Markets will monitor Fed speakers closely after the encouraging June CPI report, but it is possible the Fed may want to wait until Jackson Hole in August for a more formal shift in communication.”
Danske Bank: “With the labor market also cooling, the Fed should now be very close to having sufficient confidence to start easing. The meeting on 31 July cannot be ruled out but we believe they will instead choose to provide strong guidance for a September cut.”
RBC Capital Markets
Major downside risk remains a potential US recession, which is still considered a tail risk rather than a base case scenario.
Political Impact
Political factors will have an increasingly important impact on markets. President Biden remains under pressure to drop out of the Democrat race, adding an element of uncertainty. Traders will also continue to debate the implications of a Trump victory in November.
BNP Paribas Perspective
“The USD remains well supported, which we expect to continue as the US presidential election in November gets closer.”
Expectation that the dollar will lose ground during 2025.
The divergence in forecasts from BNP Paribas and RBC Capital Markets highlights the uncertainty and potential volatility in the GBP/USD exchange rate over the next few years, influenced by both economic data and political developments.
