Pound to Dollar Week Ahead Forecast: Still Heavy, But Looking for a Limited Rebound

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The Pound to Dollar exchange rate fell 2.0% last week and still looks heavy, but a limited rebound is possible in the coming days.

The exchange rate's decline comes amidst a reappraisal of how fast the Federal Reserve will be able to cut interest rates going forward, given an upturn in the U.S. economic pulse.

"The FX market has suffered a hard reset as the notion of an aggressively dovish Fed has now evaporated," says Francesco Pesole, an FX strategist at ING Bank.

The month's most important data print was released Friday in the form of the non-farm payrolls report, which showed an unexpected improvement in the U.S. job situation. 254k jobs were created in September, smashing expectations for a 147K reading.

Any hopes of at least one more bumper 50 basis point rate cut before year-end were dealt a blow by these data, and investors are wondering if they will get away with two 25bp cuts. Indeed, a single 25 basis point cut is not out of the bounds of reality.

So there has been a big readjustment in expectations, and with a 2.0% weekly fall in the rear-view mirror, some dip buying is possible in GBP/USD.

GBP/USD has now fallen back to the 50-day moving average located at 1.3078, which offered support on Friday. This now forms the near-term support level to watch in the coming week and some unwind of the strong selloff can occur from around these levels:

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Beware that a confirmed break below the 50 DMA at any point in the coming days would represent a more determined breakdown is underway that could risk flipping GBP/USD from a medium-term uptrend to a downtrend.

"Many of the factors that weighed on the Dollar through the summer had reversed—our data surprise index has steadily improved, recession concerns have faded somewhat, and price action after the Fed’s 50bp cut suggests we are at the limits of pricing a dovish reaction function with this dataset," says Kamakshya Trivedi, an analyst at Goldman Sachs.

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Downside risks also come in the form of ongoing geopolitical concerns centred over the Middle East.

Bear in mind that Israel has promised a significant retaliation to last week's Iranian missile attack. The scale and nature of the attack could be significant and could drive demand for currencies that are sought when investors are fearful, such as the Dollar, Yen and Franc.

The upside in GBP/USD will be contained below the 2024 highs (1.34) and it will require signs of a renewed slowdown in the U.S. economy to drive the next leg of the GBP/USD appreciation.

We won't get any chance of the kind of data required to push this narrative until late

Thursday's U.S. inflation report is the highlight of the week, as it will determine how market sentiment evolves in line with expectations for Fed rate cuts.

A below-expectation reading would firm hopes that the Federal Reserve will cut interest rates two more times in 2024, which can bolster GBP against the EUR and USD.

The market is looking for a reading of 2.3% year-on-year and 0.1% month-on-month. Anything above this could act to pushback against rate cut expectations yet further and could see GBP struggle into the weekend.