Image: Dave Collier, sourced: Flickr, licensing: CC 2.0.
The pound's multi-month rally against the dollar is effectively over show updated forecasts.
ING's currency strategy team have updated with their latest global expectations for the pound vs. the dollar, showing that we're entering a period of more enduring dollar resilience.
"Hot US inflation can keep offering the dollar some support and test buoyant equity markets in the short term," says ING's newest monthly currency market update.
The dollar has strengthened against the pound and other major currencies during the latter part of May; the pound to dollar exchange rate is 1.30% lower on the month at 2.3429, a performance that is entirely in keeping with long-running seasonal dynamics that find May is traditionally a weak month for the pair.
But ING's research finds there's more to the picture than seasonals, and underlying dynamics are shifting in favour of USD resilience:
"The dollar should be trading stronger based on US energy independence, surging AI-driven investment and a less dovish sounding Fed. Those positives could well build over coming months as inflation ripples around the world and stagflation hits the eurozone," says ING.
Turning to the pound, analysts think lingering political uncertainties can act as a constraint, further limiting GBP/USD upside.
"The UK political situation looks fluid. The Labour Party looks like it wants a new leader, but PM Starmer is vowing to fight on," say analysts. "This psychodrama could take two to three months to unfold if Andy Burnham – seen as the most negative sterling candidate – enters the race to replace Starmer."
Regarding potential outcomes, a best-case for sterling would be Starmer and Chancellor Rachel Reeves remaining in place. "Most other options are GBP negative as Labour policy is pulled leftwards."
Turning to policy, strategists think the market is expecting too much by way of Bank of England interest rate cuts.
"We look for just one hike in June this year. That outcome can keep GBP/USD well contained in its range," says ING.
Given these developments, pound-dollar is forecast at 1.34 on a three-month timeline, 1.36 at six months and 1.35 in a year.
On that basis, the pound's multi-month rally against the dollar is complete.