Pound Sterling, Euro and Dollar Forecast Update from Wells Fargo: Dollar Dominance to Continue

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Wells Fargo, the third largest bank in the U.S. by assets and deposits, predicts the Dollar will remain dominant over coming weeks, but strength should wane from the first quarter of 2023.

In a financial market forecast update the bank expects the Pound and Euro will continue to struggle against the Greenback, but Sterling will likely remain supported against the Euro.

The findings therefore suggest the ongoing trends of Dollar dominance and Euro weakness are not yet done and levels below parity in EUR/USD and sub-1.20 in GBP/USD are likely.

GBP/EUR levels around 1.19 over coming months are also likely.

Wells Fargo's High Conviction Views

On the Pound:

Nick Bennenbroek, International Economist, Wells Fargo Securities, says prospects for the British pound remain underwhelming and he expects a less hawkish Bank of England relative to financial market pricing.

The Bank of England delivers its next policy decision on August 04 and there is a high probability of an outsized 50 basis point hike.

However, whether this is followed up with a similar sized hike in September is less certain.

Currently markets are positioned for Bank Rate to rise all the way to 3.0%, but economists continue to cast doubt on this, predicting the tightness in UK labour markets that is generating wage increases should ease and inflation will likely fall rapidly in 2023.

If these predictions are correct it negates the need for further aggressive hikes by the Bank, meaning interest rate expectations must come down, in turn potentially weighing on Sterling exchange rates.

"While inflation is elevated in the UK, economic activity is decelerating amid high energy prices and declining purchasing power. As the BoE under-delivers, the British pound should weaken sharply over the remainder of 2022 and into the early part of next year," says Bennenbroek.

On the Euro:

Wells Fargo have become less constructive on the Euro's prospects.

"With the Eurozone now expected to fall into recession and a relatively limited monetary tightening cycle likely from the European Central Bank (ECB), we expect the EUR/USD exchange rate to fall to $0.9600 or lower," says Bennenbroek.

Eurozone recession fears have risen sharply this week amidst news of restricted Russian gas flows and fears of Eurozone-wide gas rationing this winter.

Germany, the Eurozone's manufacturing powerhouse and largest economy, is particularly exposed to gas shortages and rationing is likely over the winter months.

"As recession fears ripple around the world, we now forecast a recession for the Eurozone region next year. Elevated inflation, reduced consumer purchasing power, energy supply disruptions and central bank tightening are all factors that we see contributing to the Eurozone economy contracting 0.2% in 2023," says Bennenbroek.

On the Dollar:

"We continue to forecast a stronger U.S. dollar against most foreign currencies through early 2023," says Bennenbroek.

Wells Fargo expects the U.S. dollar to strengthen moderately further through the rest of 2022 and into early 2023.

However, as inflation shows more concrete signs of peaking, and once tightening expectations and bond yields recede, they see a peak in the greenback by Q1 next year and anticipate the U.S. dollar to soften through much of 2023.

"We expect a recovery in most G10 and emerging currencies," says Bennenbroek.

Wells Fargo now forecasts the trade-weighted dollar to hit a cyclical peak in early 2023, earlier than previously forecast, and softening against most foreign currencies over the course off 2023.

Key Exchange Rate Forecasts for Remainder of 2022 and 2023

The Pound to Dollar exchange rate is forecast by Wells Fargo to end 2022 at 1.17, be at 1.16 by the mid point of 2023 and end next year at 1.18.

The Euro to Dollar exchange rate is forecast by Wells Fargo at 0.98, 0.97 and 1.0100 for the same timeframe.

This gives a Pound to Euro exchange rate forecast profile of 1.1940, 1.1960 and 1.1683.