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The British pound looks set to extend its recovery against the dollar this week, though the dollar's medium-term strengths should cap it beyond that.
The Pound to Dollar exchange rate has rebounded after consolidating through early October, and we forecast a further move higher this week as a setback in the AI equity trade pulls bond yields and the dollar lower.
This is mean-reversion after a heavy September decline, and the forces that powered the dollar through the autumn have not gone away, so we would give the recovery space near-term without reading it as a turn.
From a technical perspective, the falling 100-day exponential moving average - the red line in the below chart - is the natural objective for the rebound:
GBP/USD daily chart. Image © Pound Sterling Live, chart created with TradingView.
GBP/USD trades at 1.3333 at the start of the new week, putting it above graphical horizontal support at 1.3302, a line that capped the pair through the first half of October.
The pair dipped to 1.3137 on Wednesday, testing the 2026 low at 1.3140, before rallying to 1.3372 on Friday.
That rally carried the pair back above the 21-day moving average, shown in blue, which had been falling since mid-September and has now begun to flatten at 1.3256.
The 100-day sits at 1.3388 and has been pointing lower since early September. A falling average above a recovering market narrows the gap from both sides, and we see it within reach this week.
Graphical horizontal support at 1.3274 and 1.3302 now sits beneath the market, and old resistance turned support should cushion any dips on the way.
We look for the recovery to extend to the 100-day this week, and a daily close back beneath 1.3274 would change our near-term Pound to Dollar forecast.
Further out, the 100-day caps a pair that has made lower highs since August's 1.3676 peak, and the picture stays one of dollar strength until that changes.
A week ago we said weakness would resume once the consolidation ended, with 1.3150 the target. Wednesday's low delivered that, but the reversal came quickly, and Friday's high stopped eight pips short of the 1.3380 we named as the cap on recoveries.
An AI Equity Wobble Weighs on the Dollar
The rebound looks to be driven by a setback in the AI equity trade, as a selloff in technology stocks sent investors into the safety of government bonds.
U.S. ten-year yields fell 30 basis points and 30-year yields 33 basis points in the rally, according to a rates note from Commonwealth Bank of Australia on 16 October, which reads the move as "a clear reflection of excessive bearishness that had previously set in."
Lower yields reduce the return on holding dollars, and that dynamic is weighing on the U.S. currency more generally.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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Talk to a specialist"If stocks are the tail that now wag the dog and valuations in AI and tech become more difficult to justify, we should heed the direction of tech and a balancing factor to inflation," says Societe Generale in a morning briefing of 15 October.
The Federal Reserve has entered its blackout period before its 28 October decision, and "Fed-speak suggests that we won't see a follow up US rate hike in October not-withstanding the higher September CPI data," adds the Aussie lender.
The Dollar's Medium-Term Supports Are Still Alive
U.S. inflation is running hot enough to keep further Fed tightening on the table, which keeps the dollar's medium-term support intact.
Core services inflation excluding rent picked up to a two-month average of 0.47% month-on-month in September, and Societe Generale says that means "more work for the Fed to get ahead of the inflation curve."
CIBC Capital Markets expects the dollar to strengthen on a medium-term view, driven by AI-related capital inflows into the U.S. and an elevated U.S. neutral interest rate.
On the sterling side, Wednesday's UK inflation figures are the week's calendar highlight for GBP/USD, with the market looking for headline CPI to rise to 3.4% in September from 3.1%. A higher print would back the pound and a lower one would weigh on it.
"Despite the recent positive data surprises out of the UK, we think that the current market pricing of BoE rate hikes is excessive and suggests that many BoE-related positives are already in the price of the GBP," says a weekly FX note from Crédit Agricole CIB published on 16 October.
With the dollar's medium-term supports still alive, we would treat this week's recovery as an opportunity that runs to the 100-day and no further, which is consistent with our Pound to Dollar forecast of near-term gains inside a broader dollar-led trend.
