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Our forecast for the pound vs. dollar made two ten days ago was bang on the money.

The pound to dollar exchange rate has behaved exactly as we said it would in a short-term forecast set out ten days ago.

Our Week Ahead Forecast issued on Monday, September 29, looked for a slight GBP rebound, followed by a more concerted decline to a noted support area. Here is the chart overlay from that day:

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Now, keeping that overlay and fast forwarding to today, here is where we are:

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The call proved to be unusually accurate. Typically, the arrows are supposed to give an approximation of directionality, but this time, the target levels were also correct.

So, where to next? Clearly we are in a bullish setup for the dollar, even with the U.S. government shutdown underway.

Past shutdowns have tended to weigh on the dollar, but this time around, the currency is giving it a nonchalant shrug.

The shutdown also brings a dearth of official data, and the Greenback looks to be treating this as a classic ‘no news is good news’ environment.

But, it’s also worth pointing out that ex-USD, there is a lot going on, and for some key currencies, the news is clearly not great:

The JPY is the big faller as new Prime Minister Sanae Takaichi is elected. She is a devout follower of the Abenomics faith: i.e. get the central bank to keep interest rates low and then buy up all the government debt you can issue. This kills expectations for further rate hikes and flattens the yen. As USD/JPY rises, all the other USD- crosses rise too.

The EUR rally has hit the buffers on the reality that France’s domestic political setup is an intractable mess. Sure, the government can muddle on, but in the big picture, it becomes more likely the ECB will have to step in to support French government bonds at some point.

This will effectively mean the ECB rescues a fiscally irresponsible country, and the rest of the Eurozone will ask why they have to behave and France gets away with whatever it likes. This isn’t good for Eurozone fiscal integration and points to the perennial weaknesses of the bloc.

Also, Germany’s economic data has really disappointed of late, indicating another poor quarter is underway.

The GBP is facing significant fiscal challenges too. Unlike France, the UK does not live in a big monetary union underpinned by Germany and where the ECB is poised to lend assistance. The bond market will come knocking on Number 11’s door before it does at the Bercy building in Paris. With Labour unwilling to cut spending, higher taxes are coming. Businesses are starting to struggle under the weight of the tax increases implemented this year, and anxiety is growing ahead of another big-tax budget in November.

So, with some big currencies under pressure, the USD has little choice but to rise.

Gains can continue into year-end, further pressuring GBP/USD, but come 2026, some fundamental weaknesses in the U.S. can come to the fore again, and the bigger USD selloff can resume.