Pound to Dollar Forecast: Detailed Analysis
Pound to Dollar Forecast – Pound Recovers from Historic Lows, But Near-Term Outlook is Bearish
With the Fed increasing rates and inflation ravaging most countries, the US dollar has been strengthening with respect to all other country’s currencies. DXY index which represents the strength of the US dollar against of basket of currencies reached a high of 114.18, the level that was last seen in 2002 [See Chart Below].
During the peak of Covid, DXY was hovering around 102. It raises a basic question, Is the economic condition around the globe worse than Covid, and are investors seeing only the dollar as the safe haven?
The Great Britain Pound or Sterling Pound is no different than other currencies with respect to the dollar. It touched an infamous all-time low of $1.03 on September 26th, 2022. What are the factors affecting GBP/USD?
In this article, we will look up these factors and try to gauge where is GBP headed from fundamental and technical perspectives.
Pound to USD Forecast: Factors Affecting GBP/USD
Interest rate hike by Bank of England-The primary reason for the Dollar being very strong against the Sterling is the continuous monetary tightening by US central bank Federal Reserve (Fed) in the year 2022. In the last six meetings, Fed has increased the rate five times, with a three-quarter rise in the last three meetings.
The current benchmark lending rate is 3%-3.25%. It has been the highest since the global financial crisis of 2008. It further plans to rise the interest rates by another 1.25% at least by end of 2022 in the last two meetings, one in November and the last one in December. This quantitative tightening by the US led to a decrease in the supply of the US dollar against all global currencies and hence there were good reasons for the Dollar to strengthen against other currencies.
But it is not just about the Fed, it is also about the actions of the Bank of England and new Prime Minister Liz Truss
Quantitative tightening by the Bank of England (BoE) is not as severe as that of the Fed. In the last meeting that ended on 21st September 2022, MPC decided to increase the interest rates by only 0.5%, and take it to 2.25%. This is significantly lower than that of the US. As BoE remains dovish as compared to Fed and interest rates are not expected to increase above 3% by end of 2022 in the UK, the currency will face the heat and higher inflation for longer. Therefore, economists at Barclays expect there is more downside to the Pound with respect to the US dollar by end of 2022
Government U-turn on tax cut plans– British Prime Minister Liz Truss announced a new “growth plan” on September 23rd, 2022, to cut taxes and regulations to take the economy out of stagnant growth. The most controversial decision in this plan was scrapping 45 percent of income tax for people earning over 150,000 pounds. But this plan was not taken well by the investors, as they lost confidence in the government and this move hammered the pound to an all-time low of $1.03. BoE had to intervene with the 65-billion-pound bond purchase program. But, on 3rd October 2022, the government decided to take a U-turn on its announcement of a tax cut of the highest slab.
It is a humiliation for the new government, but the plan was for an overall reduction of 45 billion pounds, and the U-turn saved only 2 billion pounds. The UK is expected to face a rating downgrade. For example, S&P Global Ratings cut the UK’s credit outlook from stable to negative. Similarly, Moody’s Investors Service also predicts that this stimulus will do permanent damage to the country’s public finances. Currency is the reflection of confidence in the government and its credit growth. This misstep by the UK government has harmed the pound and is one of the main reasons for the current downfall. Till this trust is restored, analysts see more pain for the Sterling against US Dollar.
Wider Deficits – At present, UK’s current account and fiscal deficits stand at in excess of 7% of GDP, and therefore, BoE can use limited resources only to control the fall of the Sterling. Excess use of reserve by the central bank will lead to a balance of payment crisis and may lead to further aggravating the problems. Hence, if Sterling slid further, there isn’t much that the BOE could do.
OPEC+ decides to cut oil production-In a major turnaround, in a meeting on October 5th, 2022, OPEC members have decided to cut oil production by 2 million barrels a day. This news has made brent crude prices rally further.
Oil prices touched $93 per barrel on 6th October 2022. Rising crude oil prices are negative news for the UK and the Sterling because with increasing crude prices, gasoline prices are also expected to rise and a northern hemisphere winter is waiting for the UK. This will increase gasoline consumption and will have a negative impact on Sterling.
Pound to USD Forecast: GBP/USD Technical Analysis
Sterling Pound is falling since June 2021. It formed a high last year of $1.42 on 31st May 2021. Since then, it has been on a downward trajectory, breaching one support after the other to make an all-time low of $1.03 on 26th September 2022, against the backdrop of the misfiring of the “mini-budget” by the new Prime Minister.
It has been recovering for the last few days and is trading near $1.1. However, it is at great risk of falling back to $1.03 in the next few weeks.
Talking about the resistance, the next psychological resistance is $1.16. After that, $1.17 is very strong resistance and if that is broken decisively, $1.19 is a very strong resistance. $1.19 is the same level formed in September 2016, at the time of Brexit.
Pound to Dollar Forecast Next 6 Months
Aggregated Forecast: The Pound is expected to trade at $1.03 in 6 months’ time.
Pound to Dollar Forecast: What Lies Ahead for GBP?
There are so many factors affecting GBP, especially with respect to USD. Technical indicators are giving bearish signals for the currency, with it being below all the major moving averages.
UK government faces a double whammy in the form of rising chances of a recession and already high inflation. If BoE remains dovish, it may lead to even higher inflation and their hawkish stand will take UK one step closer to recession.
However, the hawkish stand will strengthen the GBP for sure. The problem is that there are external global problems, and then there are internal UK problems, like losing confidence in the government which is hurting the Sterling. The newly formed UK government has to come up with clear agenda of supporting the currency to restrict any further downfall in GBP.
Note: Crowdwisdom360 collates Predictions and data from all over the net and has no in-house view on the likely trends in the Currency or Individual Stocks. Please consult a registered investment advisor to guide you on your financial decisions.