Pound to Dollar Forecast: GBP Holds Firm Despite USD Recovery
– Written by
David Woodsmith
STORY LINK Pound to Dollar Forecast: GBP Holds Firm Despite USD Recovery
The Pound to Dollar exchange rate (GBP/USD) slipped back from 20-day highs near 1.3400 as renewed Middle East tensions encouraged investors to rotate back into the US Dollar. Despite the pullback, Sterling remained relatively resilient, with markets continuing to favour the Pound on improving UK sentiment while awaiting fresh clues on the Federal Reserve’s policy outlook.
GBP/USD Forecasts: 3-Week Highs
The Pound to Dollar (GBP/USD) exchange rate posted a strong advance to 3-week highs at 1.3430 in Asian trading on Thursday before a significant retreat to near 1.3400.
A break above 1.3450 could trigger a challenge on 2-month highs in the 1.36 area.
The dollar and Pound have both continued to gain traction in global markets with the focus on energy prices and yields.
The dollar gained initial support from a dip in risk appetite, but asset prices overall were resilient while higher yields underpinned the Pound.
ING commented; “High-yielding currencies can enjoy better insulation against the stronger dollar given the summer months and investors’ tendency to jump into carry trade positions on any sell-off.”
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There will, however, still be unease over underlying UK fiscal trends and a further increase in yields could start to undermine the Pound, especially if there are renewed fears over the economic policies under Prime Minister Burnham.
After strong gains on Wednesday, oil prices were little changed, but with a gain of over 10% this week.
Kyle Rodda, senior financial market analyst at Capital.com commented; “A flare-up of Middle East tensions has rattled global markets again and jammed a war risk premium back into asset prices.”
There are also potential implications for Federal Reserve policy
Rodda added; “A jump in oil prices could bring forward the timing of a Fed hike.”
According to ING; “Our bias is that higher energy prices will provide fuel for the Fed hawks and keep the dollar supported on dips – particularly against the low yielders.
MUFG also noted potential risks; “If tensions in the region were to intensify further and the price of oil continue to rise sharpy, it could reinforce the USD’s recent upward momentum especially now that the Fed has indicated that it is open to raising rates this year. US yields moved back towards recent highs yesterday.”
Minutes from June’s Federal Reserve minutes suggested two clear scenarios. One group indicated that rate cuts will be delayed while another section will want a near-term rate hike if inflation remains high.
MUFG is still cautious over the dollar outlook; “Overall, the minutes support our view that the new Fed Chair Warsh will favour leaving rates on hold if energy prices remain at lower levels. We expect the US dollar to give back recent gains if Fed rate hike expectations are disappointed, although acknowledged that renewed tensions in the Middle East pose upside risks.”
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TAGS: Pound Dollar Forecasts
