Pound to dollar rate steadies after tanking on U.S. CPI

Cable edges up after tanking on Thursday’s hotter-than-expected U.S. CPI reading

The British pound, which had previously reached a three-week high of $1.234 on October 11, saw a mild recovery against the dollar (GBP/USD) on Friday after tanking on Thursday. The pound to dollar rate, widely known as “cable” in forex markets, posted its largest daily decline since March due to unexpected U.S. inflation data, which rattled investors.

Sterling saw a modest 0.13% increase during Friday trading, reaching $1.2190, following a 1.1% drop the previous day when the dollar gained strength across the board.

Against the euro, the pound also rose by 0.1% to 86.40 pence. On Thursday, the pound had performed poorly against the euro, recording a 0.3% decrease, marking its most substantial single-day decline in three weeks.

The UK's most recent GDP report indicated 0.2% growth in August, aligning with expectations and marking a recovery from a worse-than-expected 0.6% slump seen in July. The main driver of growth in August was the services sector, which grew by 0.4%, the UK’s Office for National Statistics said.

The persistence of high inflation and ongoing recession-related n have raised concerns among policymakers in the UK as they prepare for the upcoming interest rate decision scheduled for November. Last month, the Bank of England (BoE) held UK interest rates at 5.25% — the highest in 15 years.

UK interest rates: MPC members weigh in on the BoE’s “higher-for-longer" stance

Dr. Catherine Mann, an economist and member of the BoE’s Monetary Policy Committee (MPC) has recently voiced her support for further policy tightening to swiftly bring inflation back to the 2% target, as highlighted by Reuters. Policy "has to be more aggressive because it has to address both a drift in expectations as well as the actual inflation," Dr. Mann said in a comment on Tuesday.

"The longer we wait ... from a risk management perspective I am more concerned about this embeddedness, the duration, the expectations,” she added.

On the other hand, Dr. Swati Dhingra, another member of the nine-strong MPC, has said a rate cut may come around sooner if the growth rate falls below expectations.

Speaking exclusively to the BBC, she said: "The economy's already flatlined. And we think only about 20% or 25% of the impact of the interest rate hikes have been fed through to the economy. So I think that there's also this worry that that might mean that we're going to have to pay a higher cost than we should be paying."

Due to recent data, including a dip in GDP in July, the BoE now expects the economy to grow only very modestly over the second half of this year.

The situation may be even worse, according to Dr. Dhingra:

"When you're growing as slowly as we're growing now, the chances of recession or not recession are going to be pretty equally balanced. So we should be prepared for that. It's not going to be great times ahead."

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Pound to dollar forecasts: Analysts cautiously bullish on cable

In his GBPUSD technical analysis, Investing.com contributor Damian Nowiszewski noted that a break above 1.2340 may indicate further upward movements towards 1.2600. Nowiszewski’S GBP forecast also indicated that the 1.20 mark was a target for investors that were bearish on the currency:

“The GBP/USD pair is moving within the framework of a downtrend rebound, which is testing the first major resistance level falling in the price area of 1.2340 further confirmed by the downward trend line. If we see a break above the indicated area, which, given the dynamics of the rebound, is very likely, then we should look for the next targets slightly below 1.2600.

We will be able to talk about a return to the trend in the situation of the appearance of a clear downward formation with a strong impulse, which will indicate the possibility of negating the current movement in the upward direction.

For bears, the psychological barrier of 1.20 remains an invariable target.”

Dutch bank ING offered an updated long-term pound to dollar forecast in the latest edition of its FX Talking currency overview on Monday, October 9. FX Strategist Francesco Pesole and Global Head of Markets Chris Turner projected that the BoE’s tightening cycle would likely be over at the next meeting:

“The Bank of England surprised some by leaving the Bank Rate unchanged at 5.25% in September. The vote was close however: 5-4. Barring some big upside surprises to the inflation and wage data published on October 17/18th, we think policy will be left unchanged at the Nov 2nd meeting and the cycle will be over.

Investors still price 18bp of further BoE tightening, which suggests sterling can drop a little when this is priced out. But GBP/USD should find support at the lower end of this 1.20-1.30 range.”

ING’s one-month pound to dollar forecast saw the pair trading at a potential average of $1.21, before rising to $1.22 in three months’ time and $1.23 by April 2024.

Euro to dollar forecasts: BofA sees 0.85 in its forecast horizon

Sterling could appreciate against the euro if the Bank of England’s interest rates remain high for longer as is widely expected by markets, Bank of America analysts said in a note shared with Reuters:

"We remain of the view the BoE won't help sterling much near term, but a 'high for longer' BoE could help sterling versus euro later - we see EURGBP at 85 pence through our forecast horizon.”

At the time of writing, the GBP/USD pair was trading at $1.2255, up 0.13% on the day, as per MarketWatch data.

When considering foreign currency (forex) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.