Pound-Dollar Outlook: Goldman Sachs says Greenback's Rally Likely Done

- GBP/USD on route to 1.40 says bank
- USD's easy gains are in
- "We forecast broad Dollar depreciation over time"

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• GBP/USD reference rates at publication:
• Spot: 1.3763
• Bank transfers (indicative guide): 1.3378-1.3475
• Money transfer specialist rates (indicative): 1.3636-1.3664
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The Pound-to-Dollar exchange rate has built on Friday's post-Jackson Hole gains ahead of the new month, with Goldman Sachs confirming the pair could be on the way to a level above 1.41.

In a weekly foreign exchange research briefing Goldman Sachs says they are expecting the Dollar to trend lower over coming weeks, although the journey won't be smooth.

The Dollar had been 2021's best performing major currency at various points in August, in part thanks to investors anticipating a 'hawkish' outcome to Federal Reserve Chair Jerome Powell's speech to the Jackson Hole conference.

But Powell's address effectively capped the Dollar's appreciation potential after he said the Fed will not be rushed into raising interest rates.

We noted on Friday in the aftermath of the speech that the market had been caught by surprise: Powell confirmed the Fed was ready to reduce its quantitative easing programme (+ve for the USD, but he said there was no rush to raise rates (-ve for USD).

The Dollar fell following the speech, suggesting the market was expecting an interest rate rise to follow the ending of quantitative easing in 2022.

Powell said raising interest rates will face a "substantially more stringent test" than that required to end quantitative easing.

Ending quantitative easing - which will see the Fed gradually taper its asset purchases - is expected to commence in November and end by mid-2022.

Expectations for this taper helped the Dollar rally over recent months, but with this now 'in the price' the Dollar is left looking for new drivers.

"Shifting Fed expectations have supported the Dollar over the last two month. But with tapering now largely priced in, and the currency stronger as a result, following through with the process should not drive the Dollar higher from this point forward. We therefore expect the greenback to stabilize over the coming weeks," says Zach Pandl at Goldman Sachs.

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With the taper story now being effectively in the price, economists say guidance from the Fed on interest rate rises will be key to the Dollar's outlook.

"Jackson Hole was a surprise not because of the anticipated taper guidance but because it brought the start of Chair Powell's dovish rate policy guidance, which is the next - and more important - phase of the Fed's process of accommodation removal. The Fed's dovish rate guidance will likely be a force for the continuation of very low rates even after hikes begin," says Ralph Axel, Rates Strategist at Bank of America.

The Pound is expected appreciate against the Dollar over the course of the next three months, with Goldman Sachs eyeing levels above 1.40 as attainable.

"We forecast broad Dollar depreciation over time on our expectation that the global economic recovery will continue and that slowing domestic growth and lower inflation will allow the Fed to remain on hold until Q3 2023," says Pandl.

The Pound-Dollar exchange rate fell to a low of 1.3602 on August 20 amidst a broad based rally in the Dollar.

It has since recovered to 1.3776, with a good portion of these gains being realised in the wake of the Jackson Hole speech.

Although Goldman Sachs anticipate a weaker U.S. Dollar in coming weeks and months, the journey lower could be slow and volatile.

Indeed, the Dollar is not expected to endure a meaningful trend of decline until markets receive "clearer signs that delta variant outbreaks are behind us and that US inflation pressures have come down," says Pandl.

Goldman Sachs forecast the Euro-Dollar exchange rate at 1.20 in three months, the Pound-Dollar exchange rate is forecast at 1.41 in three months.

In six months the forecast levels are set at 1.23 and 1.45 respectively.