Pound to Dollar Rate Could Reach 1.30 by Year-end Says Nomura 

 

"We believe the balance of risks lies to the topside of those forecasts if energy prices decline even further" - Nomura.

 

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The Pound to Dollar exchange rate has rallied strongly in recent months and could rise further to 1.30 or so before the curtain closes on 2023, according to strategists at Nomura, although any buyers of Sterling will also have to navigate risks relating to the Bank of England (BoE) along the way

Sterling fared better than many other currencies last month when several small bank failures in the U.S. led to speculation about an imminent end of the Federal Reserve (Fed) interest rate cycle and fueled an earlier sell-off in U.S. Dollar exchange rates.

Dollar losses and improving market sentiment about the UK economy have helped lift the Pound to Dollar rate back above 1.25 in early April, from 1.21 in January, while making Sterling one of the best performing major currencies of the year but some say the recovery has further to run.

"If one is of the view that the Fed is done with rate hikes (as we do), then GBP/USD climbing above 1.30 this year may look to be a reasonable near-term target. The one concern is the BoE," says Jordan Rochester, an FX strategist at Nomura.


Above: Pound to Dollar rate shown at daily intervals alongside GBP/EUR and EUR/USD. (To optimise the timing of international payments you could consider setting a free FX rate alert here.)


"The BoE may weigh on GBP if and when it makes a dovish turn. We like GBP/USD higher this year, but recommend that investors wait for this moment of BoE repricing before stepping in," he adds in a Thursday research briefing.

Implied measures of expectations suggest financial markets see further increases in Bank Rate as highly likely for the coming months but Rochester and the Nomura team cite forward-looking indicators of inflation for being sceptical of the idea that these would be delivered.

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UK inflation rose from 10.1% to 10.4% in February, substantially reversing an earlier fall, but the BoE cited declining energy prices and taxpayer-funded subsidies in March when sticking with its earlier forecast suggesting annual price growth will fall significantly this quarter.

"In Q2 we are concerned the BoE may take a dovish turn and markets may price out the remaining 48bp of this year, while the ECB hikes through to July. If this materialises then we could see EUR/GBP test the 0.90-0.92 range [GBP/EUR: 1.0869 to 1.1111 range]," Rochester says.


Above: Pound to Dollar rate shown at weekly intervals with Fibonacci retracements of June 2021 and February 2022 downtrends indicating possible areas of technical resistance for Sterling.

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"But by year-end our EUR/USD view (we forecast 1.14 for this year-end) combined with a relatively flat EUR/GBP (0.88) [GBP/EUR: 1.1363] could get GBP/USD to 1.30 and to 1.40 by end-2024. We believe the balance of risks lies to the topside of those forecasts if energy prices decline even further," he adds.

BoE forecasts indicated in February that inflation is likely to fall back to around 4% by year-end before falling below the 2% target toward the end of 2024 even if Bank Rate remains unchanged at its newly increased 4.25% level in the interim.

This could mean the BoE will be reluctant to raise interest rates further in May and the subsequent months, leading to a temporary setback for Sterling, although the Nomura team says events elsewhere in the world might still see the Pound to Dollar rate rising further in the second half of the year.

"As Europe is experiencing a positive terms-of-trade shock, markets are pricing in Fed cuts and China is still in the early stages of reopening, it would be unusual for GBP not to benefit," Rochester says.