Pound-to-Dollar Week Ahead Forecast: Pullback Can Extend

🎯 GBP/USD year-ahead forecast: Consensus targets from our survey of over 30 investment bank projections. Request your copy.

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USD resilience expected, payrolls and inflation data on tap.

We anticipate another week of dollar resilience against sterling, but note that the Greenback starts Monday on the backfoot, experiencing losses against most peers.

USD weakness will most likely be linked to some heavy JPY buying following Japan's weekend elections that delivered a stonking majority for Sanae Takahashi.

This USD weakness flatters the pound somewhat; the UK currency looks vulnerable as weekend developments leave current Prime Minister Keir Starmer on borrowed time.

On Sunday Prime Minister Keir Starmer accepted the resignation of his Chief of Staff, Morgan McSweeney, in an attempt t deflect criticism of his leadership and the deteriorating fortunes of the Labour Party.

The resignation is designed to protect Starmer, but the Prime Minister looks wounded and highly vulnerable in the event of a bad set of May local election results. For the pound, the political uncertainty is a distinct headwind.

However, the dollar still remains the ultimate determiner of direction in the pound to dollar exchange rate (GBP/USD), which trades at 1.3590 on Monday.

The pair fell half a per cent last week as it retreated from four-year highs as the dollar recovered from a bruising end to January.

We suspect we're still in a consolidative phase for the USD, which will be helped by strong seasonal factors: February is usually a very good month for the Greenback.

So, if USD selling subsides, GBP/USD will edge lower.

"The dollar has had a tumultuous January but has found its footing over the past week. We remain bearish but feel some of the hype over concepts such as ‘debasement’ and ‘sell America’ are overdone at this stage. Evidence thus far does not support these claims," says Alex Cohen, FX Strategist at Bank of America.

🎯 GBP/USD year-ahead forecast: Consensus targets from our survey of over 30 investment bank projections. Request your copy.

In the event of USD resilience extending over the next five days, we would forecast a retest of 1.35 support in GBP/USD.

The USD faces an interesting week with delayed U.S. non-farm payroll data due for release Wednesday, followed by CPI inflation data, due Friday.

These are the two monthly marquee U.S. economic releases, and any deviation from the predicted readings will impact the dollar.

"The payrolls report for January will be the highlight, as we also get the benchmark payrolls revisions. The revisions data could lower the March 2025 payrolls data by 863k jobs, which would suggest several months of negative payrolls in 2025, and would paint a much darker picture of the US labour market," says Kathleen Brooks, analyst at XTB.

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Money market pricing - gleaned from the OIS curve - shows investors are priced for two Federal Reserve rate rises this year.

Brooks says this could be recalibrated higher if the data is softer than expected, which would typically be expected to weigh on the dollar.

A counter-balance to that would be an above-consensus inflation report, which would limit the prospects for an acceleration in the Fed's cutting cycle.

"Annual and core inflation is expected to moderate slightly to 2.5% for January. However, the risks are to the upside, as January tends to see hotter inflation due to seasonal price increases," says Brooks.