– Written by
David Woodsmith
STORY LINK Pound to Dollar Forecast: 1.34 Recovery Faces Oil and Risk Sentiment Test
The Pound to Dollar exchange rate (GBP/USD) rebounded toward 1.3400 after sliding to three-month lows near 1.3250, as global markets continued to react to volatile energy prices and escalating tensions in the Middle East.
With oil prices climbing and currency traders closely watching the potential disruption to energy supplies through the Strait of Hormuz, risk sentiment and commodity movements remain the dominant drivers of GBP/USD direction.
GBP/USD Forecasts: Rebound from 3-Month Lows
The Pound to Dollar (GBP/USD) exchange rate slumped to 3-month lows just above 1.3250 on Tuesday before recovering the 1.3300 area.
The Pound came under significant pressure and the dollar posted strong gains when risk appetite deteriorated amid Middle East fears.
GBP/USD advanced further on Wednesday with the pair touching 1.3400 before trading around 1.3380. European equities attempted to rally on Wednesday which helped support the Pound.
According to UoB; “Downward momentum has eased somewhat with the strong rebound, and conditions remain deeply oversold. This suggests that GBP is unlikely to weaken further. Today, GBP is more likely to consolidate between 1.3290 and 1.3400.”
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There are still important concerns surrounding the Middle East situation and risks surrounding the energy sector. Oil prices increased further on Wednesday, although there was a significant retreat in gas prices.
Rabobank commented; “There don’t appear to be many safe havens as the situation in the Middle East continues to evolve. Not in markets, and not in the region either.”
Developments in the energy sector will remain a key influence on currency markets, although there are also significant US data releases later on Wednesday which may shift underlying dollar expectations.
According to ING; “Near term market drivers of risk will probably be both whether energy prices can reverse lower if the Straits of Hormuz can somehow reopen, and also whether central banks will be able to cut rates to support activity, or at least not tighten policy.”
The bank expects elevated energy prices will support the dollar and added; “we will need to see some clear improvement in the energy story before investors are prepared to enter short dollar positions again.”
MUFG noted a strong market impact; “In 2022 it took four weeks after the Russian invasion of Ukraine for the dollar to advance by 2.3% – and in less than two days (to yesterday’s high) the dollar was 2.1% stronger.
It added; “If the Strait of Hormuz remains blocked, faster gains for the dollar than in 2022 is likely.”
CIBC Capital Markets head of G10 FX strategy Jeremy Stretch took a similar view; “We’re still in a scenario where dollar selloffs are probably going to be short-lived and probably bought into because there is still a lot of negativity priced into most currencies, which are sensitive to energy prices.”
MUFG expects the dollar will retreat if energy prices decline.
It added; “Furthermore, recent developments at the start of this year have highlighted that US policy uncertainty is set to remain elevated and a headwind for USD performance.”
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TAGS: Pound Dollar Forecasts
