The pound-dollar exchange rate is likely to advance to 1.33 or increase by 6.86 percent compared to today’s rate by the end of the year, according to forex analysts at Dutch multinational banking firm ING.
ING analysts said the U.S. dollar would maintain a “firm tone” in the short term, especially with the Federal Reserve maintaining its hawkish tone, before declining as time went by. Analysts argue that the sustainability of the dollar trend relies on economic data confirming inflation pressures remain high, but the U.S. economic outlook is stable. The U.S. economy, however, is expected to experience a significant slowdown in the second half of 2023.
“This may be a story for the near-term, where the dollar can still find some support, but we see the second half of the year as the period where evidence of sharply slowing U.S. economic activity will force large cuts by the Fed and cause a rapid dollar depreciation,” the ING note reads.
According to ING, the economic slowdown in the U.S. may prompt the central bank to cut its benchmark interest rate by 100 basis points in the fourth quarter. The Fed last raised the interest rate by 25 basis points, pushing the federal funds rate to the range of 5.00 to 5.25 percent.
At the same time, the market expects the Bank of England (BoE) to maintain the country’s high cash rate until the second quarter of next year. The BoE increased Britain’s base rate by 25 basis points to 4.50 percent earlier this month. Analysts at ING said the BoE’s cash rate had peaked for this monetary tightening cycle, and a reassessment of the central bank policy expectations will be a gauge of the pound’s trend in forex trading.
Based on the market estimates, the BoE’s base rate will be 25 basis points over the U.S. federal funds rate by the end of the year, and the interest rate gap will widen by 125 basis points by the end of the first quarter of 2024. This interest rate gap is expected to fuel the pound’s rally over the U.S. dollar, like what happened to the euro last month.
The euro began its rally versus the greenback in mid-April as the market expected the Fed to pause its interest rate hike campaign soon while it predicted that the European Central Bank would continue raising the benchmark rate into the next year. The rally, however, lost steam after the central bank indicated that it might be pausing its monetary tightening campaign in its latest rate policy meeting.
JPMorgan, on the other hand, said it does not expect the U.S. dollar to lose gaining momentum later this year, adding that global growth models “have neutralized USD shorts.” JPMorgan predicts that the pound-dollar exchange rate will fall to 1.17 at the end of this year.
Recession risk remains high in U.S.
The U.S. will likely enter a recession in the next 12 months, according to 59 percent of economists surveyed by the National Association for Business Economics.
Economists predict that a recession will hit the U.S. in the third quarter or later, against the initial prediction of the first half of 2023. The recent banking stresses and debt ceiling crisis are expected not to lead to a significant economic downturn.
Analysts have warned that banking stresses that hit several regional lenders will lead to credit availability declines for households and businesses. The tighter credit market condition will further reduce productivity in U.S. companies and consumer spending.
Meanwhile, the debt ceiling crisis may lead to the U.S. defaulting on its debt this summer if not resolved before the deadline. A default may accelerate a recession, but experts say lawmakers will reach an agreement soon to avoid that situation.