Foreign exchange analysts at Societe Generale (SocGen) expect the US Dollar to strengthen slightly over the next few months while the Pound Sterling will slip once the Bank of England (BoE) cuts interest rates.
The Pound to Dollar exchange rate (GBP/USD) has already retreated to a 5-month low at 1.23 and SocGen expects a retreat to 1.18 at the end of 2024.
The bank notes that there is little evidence that the US economy is slowing and, with higher than expected inflation readings, it considers that the chances of a June Fed rate cut are very low.
It also considers that the Fed will be reluctant to change interest rates close to the November election. Unless the economy dips sharply, rate cuts may, therefore, have to wait until early 2025.
Other major central banks, including the Bank of England (BoE), are likely to have cut rates by then, boosting the dollar’s yield appeal.
The bank remains concerned over weak UK fundamentals and considers that high interest rates have been an essential prop for the Pound.
Although SocGen notes that the Pound has proved resilient, it still expects that it will weaken once the BoE starts to cut interest rates.
In this context, it expects gradual Pound losses over the remainder of 2024. The end-year GBP/EUR forecast is 1.1235.
Key Quotes:
"A series of stronger-than-expected US economic releases has changed the outlook for Fed policy."
"We have revised our Fed funds forecast, looking for a first rate cut in early 2025."
"An upward adjustment in US rate expectations has given the US dollar a major boost."
"It would be dangerous to be bearish the US dollar before US yields have peaked."
"If the Fed is on hold for the rest of this year and other central banks ease as expected, the peak DXY level should be in the 107-110 range."
"This suggests EUR/USD will likely erase all the gains it made in 4Q but shouldn’t revisit 2022 levels."
"Current market adjustments do not account for the near certainty that the FX market will overshoot."
"Overall, the strong US dollar and anticipated central bank policies continue to shape the dynamic and volatile FX market landscape."