Pound-to-Dollar Week Ahead Forecast: Drifting Higher, Watch Inflation Data Risks

The Dollar could strengthen if inflation numbers beat expectations.

The Pound to Dollar exchange rate (GBP/USD) looks relatively well supported at the head of a new week and we forecast further upside in the coming days.

The daily chart is relatively constructive, even if it's not exactly indicating that the British Pound is a screaming buy against its North American cousin.

GBP/USD ended last week lower than where it opened courtesy of a large fall suffered on Tuesday when UK bond markets led a global bond rout, that shaved 1.14% of value off the pound.

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The subsequent rebound was nevertheless enough to pare the majority of those losses, meaning the momentum built up in the latter part of the week holds sway as we walk into the new week.

The GBP/USD rose following the midweek JOLTS report, which showed the U.S. economy now has more unemployed people than it does job openings, confirming an ongoing deterioration in the labour market that opens the door to more Federal Reserve easing.

This narrative was rounded off nicely on Friday, when the non-farm payrolls report undershot expectations and all but confirmed the labour market is in a soft patch and the Federal Reserve could lend a hand by cutting interest rates.

Gains by GBP/USD took it back above the nine-day exponential moving average, which it successfully defended, and because we are above this indicator on Monday (it's at 1.3480), the Week Ahead Forecast model looks for further gains over the coming days.

The initial target stands at 1.3554, which forms the top of Friday's post-jobs rally.

Beyond here is 1.3594, which is the mid-August peak. This level is achievable in the event that U.S. data undermines the Dollar this week, and those looking for higher levels should consider placing an order to execute automatically on any advantageous spikes.

On Wednesday, U.S. producer prices are released. Last month's PPI data beat expectations and the Dollar reacted by going higher, which keeps us alert for a repeat performance midweek. Here, the consensus looks for a reading of 0.3% month-on-month.

GBP/USD Investment Bank Consensus Forecasts Cut

The median and mean forecasts, that provide a consensus forecast for GBP/USD, have fallen.

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Thursday's CPI inflation is the marquee data event of the week for financial markets, with the headline expected to read at 2.9% y/y and core inflation 3.1%.

This is higher than the Fed would ordinarily like, but solid evidence of a cooling labour market suggests the Fed cannot obsessively watch inflation at the expense of the labour market.

The Fed is expected to look through the near-term strength in inflation, but should the data materially beat expectations, the market would then realise the Fed is highly constrained by rising prices that it risks making worse by lowering interest rates.

Currently, the market sees a 25 basis point cut in September as a done deal, but has started to price in higher odds of a 50bp move following last week's soft non-farm payrolls and JOLTS reports. Beyond September, there's an additional 50bp worth of cuts priced for the remainder of the year (two more for 2025).

"The payrolls report triggered a big recalibration in interest rate expectations in the US. There is now a growing chance of a 50bp rate cut in the US on 17th September, and the Fed Fund Futures market is pricing in 6 rate cuts in the next 18 months," says Kathleen Brooks, an analyst at XTB.

This means Fed cuts are generously priced and there is scope for some fat to be cut on strong inflation prints. If so, then Dollar would likely strengthen.

"The risk is that a hot inflation print could cause a rapid scaling back of rate cut expectations in the coming months, and this could trigger volatility for stocks, bonds and the dollar," says Brooks.