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The British pound looks due a bounce against the dollar this week, but the post-August decline should resume.
The Pound to Dollar exchange rate carries a heavy feel into the new week after sliding in the wake of the Federal Reserve's first interest rate rise since 2023, and we think the weakness that set in during August has further to run.
Sterling fell so far so fast last week that some of the distance is likely to be clawed back, so the coming days could bring a modest recovery before sellers return.
From a technical perspective, the lower end of the year's range is attracting the market, with graphical horizontal support levels waiting there to be tested:
Above: GBP/USD daily chart. Image © Pound Sterling Live, chart created with TradingView.
GBP/USD trades at 1.3378 as the new week opens, having closed Friday at 1.3395 after the Fed's hike on 16 September and the Bank of England's hold a day later knocked the Pound lower.
Exchange rates tend to mean-revert to the 21-day moving average when they have run some distance from it, and the gap that opened over the Fed week looks too extreme to last, which could offer some technical support in the days ahead.
A shallow rebound towards the average is possible, although if the Pound simply consolidates, the 21-day will close the gap by coming down to meet it.
None of this amounts to a bullish call for GBP/USD in the days ahead.
The pair broke above graphical horizontal resistance at 1.3506 in mid-August, and the post-August decline has since taken it back beneath that level and into the lower half of the range that has contained trade over the past year, with the floor of that range near 1.3140.
Our base case is that any bounce runs out beneath the 21-day and the decline resumes later in the week, keeping the lower end of the range in view, and a daily close back above 1.3506 would challenge that view. The Pound to Dollar forecast is tilted lower beyond the near term.
Fed Hike Momentum Keeps the Dollar on the Front Foot
The Dollar carries momentum from last week's Federal Reserve decision, when the Fed raised rates by 25 basis points to 3.75-4.00% in a unanimous vote and its dot plot – the chart of policymakers' own rate projections – signalled another hike in the fourth quarter.
Markets assign a probability of just over 50% to a further hike in October, shortly before the 3 November midterm elections.
How does a Fed hike reach GBP/USD? Higher U.S. interest rates raise the return on Dollar deposits and bonds and draw global capital into the currency, and the prospect of another move in October keeps that pull in place in a week without a meeting.
Thursday's new home sales figures lead a run of second-tier U.S. releases that includes durable goods orders and regional manufacturing surveys, with Wells Fargo expecting sales to rise 2.6% to a 623K annualised pace in August. A stronger print than forecast would add to the Dollar's momentum under the usual rule that beats lift a currency and misses weigh on it.
Thursday's meeting between Presidents Trump and Xi in Washington carries more weight for the Dollar than any U.S. release, and an improvement in global risk appetite on the back of a trade agreement would trim some of its safe-haven support, while the Fed holds its hawkish line.
Bank of England Speakers Tested on November
Monetary Policy Committee members Swati Dhingra, Sarah Breeden and Clare Lombardelli speak this week, and their remarks matter mainly for how convinced the committee is of a November move, says Sanjay Raja, Chief UK Economist at Deutsche Bank, in a research note.
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Speeches that reinforce November hike expectations would support the Pound, while any pushback against them would add to its losses.
"We remain comfortable forecasting two 25bp hikes to Bank Rate, in November, and February 2027," says Rob Wood, Chief UK Economist at Pantheon Macroeconomics [VENUE AND DATE TO CONFIRM].
Tuesday's public finance figures, a second-tier release, open the countdown to Chancellor Healey's first Budget, with Deutsche Bank expecting August borrowing to jump to £17.3BN while 10-year gilt yields hold above 5%.
Speakers who sound convinced of a November hike would lend weight to this week's expected bounce, but with the Dollar still carrying the Fed's momentum they look unlikely to reverse the direction set in August. That keeps our Pound to Dollar forecast pointing lower once the reprieve fades.
