Pound / Dollar: USD Rally in its Final Chapter says Soc Gen

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The Dollar can still rise further, but by the second half of the year it will become clear the peak in the cycle has passed and a decline will begin says a leading foreign exchange analyst.

Kit Juckes, Macro Strategist at Société Générale in London, says in a monthly currency briefing the Dollar will likely rise over coming weeks, but "this is the last stage of the move".

The findings pose significant implications for the Pound to Dollar exchange rate, which like all other major currencies, has been under pressure since mid-2021 amidst a broad-based rally in the Dollar as investors began to anticipate Federal Reserve rate hikes.

These hikes are nearing with the Fed confirming this week lift-off will take place in March, and some analysts say the Fed could now hike at every meeting this year.

"Faced with a tight labour market, strong domestic demand and inflationary pressures that aren't all down to temporary supply-chain disruption, the Federal Reserve is giving markets free rein to price in more rate hikes, sooner," says Juckes.

The Pound-Dollar exchange rate rose initially in 2022 as markets priced in further Bank of England interest rate rises, but the U.S. currency has found strong bidding interest in the second half of January taking the exchange rate back down to 1.3383.

• GBP/USD reference rates at publication:
  Spot: 1.3392
• High street bank rates (indicative band): 1.3023-1.3117
• Payment specialist rates (indicative band): 1.3270-1.3325
• Find out about specialist rates and service, here
• Set up an exchange rate alert, here

Near-term, Juckes anticipates further U.S. Dollar strength, "a focus on monetary policy suggests a period of continued volatility that can put some more downward pressure on all the higher-beta currencies... we are inclined to fade rallies."

"The dollar is on cycle highs and has further to go as rate differentials and increased levels of market volatility provide support. But this is the last stage of the move," he adds.

Looking further out, the second half of the year could see fortunes turn as a global economic recovery quickens.

The Dollar is an anti-cyclical currency by nature tending to benefit when global growth is under pressure, as has been the case since the emergence of Covid-19.

"As the global economy emerges from the worst of the COVID pandemic this year, the market focus will shift to monetary policy normalisation and growth outside e the US and the best currency returns in the second half of this year are likely to come from outside the major developed economies," says the analyst.

Société Générale expects the second half of the year should see a broad-based improvement in risk sentiment, which would typically handicap the 'safe haven' USD.

"The Fed is doing a good job of getting markets to price in a brisk pace of monetary policy normalisation and that leaves scope for equity indices to rally, and risk sentiment more widely to improve," says Juckes.

"If COVID-19 becomes less deadly, and assuming global vaccine distribution continues, the seeds of a broad-based rally for growth-sensitive and emerging market currencies have already been sown," he adds.

Soc Gen hold a point forecast for the Pound-Dollar of 1.31 by mid-year, 1.32 by the end of September 2022 and 1.35 by the end of the year.