GBP/USD Rate Forecasts Raised at Goldman Sachs

Above: A view of the Goldman Sachs stall on the floor of the New York Stock Exchange. REUTERS/Brendan McDermid/File Photo.

Recent events have overtaken Goldman Sachs's base-case assumptions for 2024, and economists at the Wall Street bank have announced adjustments to their dollar forecasts before the new year begins.

Following recent downside surprises in U.S. inflation readings and last week’s Federal Reserve Open Market Committee meeting, economists at Goldman Sachs have made a "significant" change to their Fed call.

They now expect five interest rate cuts from the Federal Reserve next year, compared to just one made in the initial 2024 Outlook publication.

This has resulted in a widespread downgrade to Goldman Sachs's USD forecasts for the year ahead. "Our new forecasts incorporate more Dollar weakness than before," says Kamakshya Trivedi, an analyst at Goldman Sachs.

At the December FOMC, policymakers added a further 25 basis points of rate cuts to their assumptions for 2024, and Chair Jerome Powell said in the press conference that the Committee discussed the timing of interest rate cuts, seeing a need "to reduce restriction well before 2% inflation".

With the Fed now expected to cut rates on five occasions in 2024, the Dollar can weaken, but Goldman Sachs says it will not be a rout.

"While the Fed appears to be turning towards rate cuts as a policy preference, cuts priced and being delivered in some other jurisdictions—especially the Euro area and China—look like much more of a policy necessity. In other words, we think the Fed has already shown its dovish hand, but the ECB for example could (and probably will) shift further than it did," says Trivedi.

Both the European Central Bank and Bank of England said last week they were in no mood to consider interest rate cuts at this point. But Goldman Sachs says these, and other, central banks will ultimately embrace rate cuts, limiting USD weakness.

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Currencies with more upside from current levels are pro-cyclical currencies that should benefit from the Fed loosening its grip on financial conditions.

These include KRW, ZAR, AUD, NZD and GBP.

"We expect relatively contained returns from current levels in the key challengers that still face a number of idiosyncratic domestic hurdles (EUR, CNY and JPY)," says Trivedi.

"Effectively, evolving expectations for the Fed make it a little more comfortable for the cyclical parts of FX to be 'living in a Dollar world,' but we are still 'waiting for a challenger' to be able to take the lead and fully erode the Dollar’s strength," he adds.

Goldman Sachs now forecast the Pound to Dollar exchange rate at 1.28 in three months, an upgrade from the previous forecast of 1.25. In six months, the pair is seen at 1.30, unchanged from the previous forecast and in 12 months, the target is raised to 1.35 from 1.30.

The Euro to Dollar exchange rate is forecasted at 1.08 in three months (1.04 previously), 1.10 in six (1.06), and 1.12 in twelve months (1.10).

The Dollar to Yen exchange rate is forecasted at 145 (155), 142 (155), and 140 (150) at the aforementioned time points.

For the Australian Dollar to U.S. Dollar conversion, the profile is 0.68 (0.62), 0.70 (0.64) and 0.72 (0.66) for 3,6 and twelve months ahead. For the New Zealand Dollar to U.S. Dollar forecast, the points are 0.63 (0.57), 0.65 (0.59) and 0.67 (0.61).