Pound to Dollar Week Ahead Forecast: Risk Appears to Favour Consolidation

– Written by


Frank Davies

STORY LINK Pound to Dollar Week Ahead Forecast: Risk Appears to Favour Consolidation

The Pound to Dollar exchange rate (GBP/USD) has edged lower after failing to hold recent highs, with the dollar regaining some traction as markets reassess the outlook for US interest rates and Federal Reserve leadership.

Forecasts for the pair are increasingly split, highlighting uncertainty over whether dollar strength will persist or give way to renewed selling if institutional risks around the Fed intensify later this year.

GBP/USD Forecasts: Fed decision time

RBC Capital Markets forecasts limited Pound to Dollar (GBP/USD) exchange rate gains to 1.36 at the end of this year with a further net advance to 1.39 by the end of next year as the dollar loses ground, but notes a high degree of uncertainty.

Credit Agricole, however, expects GBP/USD will retreat to 1.30 as the dollar makes net gains

After initial losses, the dollar gained net support during the week with no evidence of further economic deterioration.

On Friday, there was renewed speculation that President Trump would nominate Warsh as the next Fed Chair and this provided net dollar support with GBP/USD dipping below 1.34 to trade at 3-week lows around 1.3370.

According to RBC, asset diversification and a reduced cost of hedging will undermine the dollar.

It added; “We expect this theme to continue to gain momentum into 2026.”

Federal Reserve policy and the risk of further attacks on Fed independence will be crucial factors this year. The issue of the next Fed Chair will continue to be watched very closely.

At this stage, markets expect no change in rates in January with only a 20% chance of a move in March.

Early in the week, The Department of Justice handed grand jury subpoenas to the central bank, threatening a criminal indictment over his testimony about renovation works at the

central bank’s headquarters.

ING commented; “The downside risks for the dollar from any indications of further determination to interfere with the Fed’s independence are substantial. If markets price back in more rate cuts, or in the long end with potential stress signs on independence risks. A sharp steepening of the curve could take the dollar on a fall.”

Deutsche Bank expects net dollar losses, but looks at potential contrary factors; “The biggest bullish risk to the USD in coming months is Fed pricing. US real rates have already declined significantly but rate pricing is the most dovish in G10 markets, leaving the market vulnerable to a hawkish repricing if the labour market stabilizes.”

UK political developments could also be an important factor.

MUFG commented; “A leadership contest would heighten political uncertainty and raise concerns about a potential shift to the left, creating renewed unease over fiscal risks – developments that could lead to at least a period of GBP underperformance.”

RBC is not convinced over this narrative; “The market’s default assumption appears to be that a change of Prime Minister/Chancellor would pivot the incumbent Labour government to the left, the market has previously reacted negatively when it appeared that the Chancellor might be about to be replaced, though we are less convinced that outcome is the given that is sometimes assumed.”

It added; “Therefore, while some cable downside risks can be priced out of 2026, new uncertainties may emerge.”

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TAGS: Pound Dollar Forecasts