Is the Dollar Going to Continue to Rise Against the Pound
The US dollar (USD) has strengthened against most other major currencies in recent months, reaching a 20-year high in mid-July.
The ICE US Dollar Index (DXY) – a measure of the currency's strength against a basket of rival currencies including the euro (EUR), Japanese yen (JPY) and British pound (GBP) – stood at 109.5 on 19 September 2022. The index was up over 14% from the start of the year, but down marginally from the 110.51 mark reached on 7 September – its highest level since 2002.
An aggressive US Federal Reserve (Fed), which has raised interest rates four times this year, for a total of 2.25 percentage points, has drawn investors to pile into the USD. In contrast, the euro's status has been knocked by its closeness to the war in Ukraine and rising energy costs, while the yen has dropped due to loose Japanese monetary policy, and the pound has declined amid dismal economic data pointing to a UK economy on the brink of recession.
The USD's status as a safe haven has been boosted by global economic slowdown fears and expectations of a hawkish Federal Reserve (Fed). However, more recently, fears of a recession in the US have pulled the greenback off its highs.
Have we seen the peak in the USD? Read on for the latest USD news and USD forecasts.
How has the USD performed so far in 2022?
After steadily climbing throughout 2021, the DXY saw a solid start to 2022.
The US Dollar Index has rallied from a low point of 94.63 in mid-January to a high of 110.51 on 7 September – a level last seen in 2002.
Since then, the price has eased slightly and currently trades close to 1% off that high.
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What is the USD?
USD is the abbreviation for the US dollar or United States dollar, the official currency for the United States, the world's largest currency. It is the world's reserve currency and the most traded currency on the foreign exchange market.
The value of the USD is measured against the value of other currencies, creating the exchange rate. For example, EUR/USD measures the euro against the US dollar.
What generally drives the USD?
Several key factors influence the value of the USD against other currencies, such as monetary policy decisions made by the Federal Reserve, which depend on the macroeconomic backdrop and data. Political events, as well as geopolitical events, can also influence the US dollar.
For example, when US inflation is elevated, and the Fed raises interest rates to rein in consumer prices, the USD value often appreciates. This is because higher interest rates attract foreign investment, lifting demand for the currency. Conversely, when interest rates are lowered to stimulate economic growth, investors could look to invest in another country, pulling the USD lower.
It is also important to remember that how the USD moves, i.e., whether the USD gets stronger or weaker, also depends on the performance of the other currency in the exchange rate.
Historical USD performance
Over the past 20 years, the US Dollar Index has traded across a wide range, from 120.00 to a low of 71.00. The index started in the year 2000 at 101.60 before rising to 121.00 in August 2001. The DXY then fell over the next few years, reaching a low of 71.00 in the financial crisis of 2008.
Since then, the USD has been steadily climbing higher to 103.80 in March 2020 as Covid hit, driving safe-haven flows. From there, the price eased back slightly to 95.70, which is where it was trading at the start of 2022.
What has been driving the USD in 2022?
Inflation has been a key concern for the market across the year and looks set to remain so.
Supply-chain bottlenecks, China's continuing Covid lockdowns, surging energy prices, the war in Ukraine and rising wages amid a post-pandemic shortage of workers have all contributed to surging consumer prices.
According to the US Bureau of Labor Statistics, inflation, as measured by the consumer price index (CPI), came in at 8.3% for August year-over-year (YoY), largely driven by food and energy price increases.
Economic growth has been disappointing, with Q2 gross domestic product (GDP) showing a contraction of -0.9%, marking a second straight decline following a -1.6% drop in Q1.
While growth could show signs of stalling, the US labour market has shown resilience, with solid job creation even as fears of surging inflation and aggressive action by the Fed rose. The US economy added 315,000 jobs in August, according to government figures cited by the Financial Times— a figure lower than the 526,000 jobs added in July and 293,000 added in June.
The unemployment rate recently rose to 3.7%, edging up 0.2% from a half-century low and suggesting the labour market is starting to loosen.
"I do think the Fed will like the fact that the labour force participation rate has gone up, but the bigger issue for them remains that 300,000 jobs a month is still way too fast," Ajay Rajadhyaksha, global chair of research at Barclays, told the Financial Times on 2 September.
In light of rising inflation, a strong labour market and slowing growth, the market questions how aggressively the Fed could hike interest rates. The US central bank issued a 50 basis-point (bp) hike in May and a 75bp hike in June.
The Fed raised interest rates by a further 75bp on 27 July, raising the benchmark overnight borrowing rate to a range of 2.25%-2.5%, making for a cumulative 225bp of rate hikes this year so far.
Markets are currently expecting the Fed to raise rates at least by another 75bp in September. ING Group analysts James Knightley, Padhraic Garvey and Chris Turner summarised the position in a central bank policy overview on 17 September:
"The market was favouring a 75bp hike ahead of the August CPI report, but higher-than-expected inflation numbers – that saw the core rate accelerate to 6.3% from 5.9% – have led the market to price a 20% chance that the Fed goes over and above that and opts for a 100bp move. 75bp is still our favoured call and the overwhelming majority of economists appear to think the same.
"Inflation appears to be stickier than we'd first thought and remains broad-based. That said, there isn't a great deal the Fed can do about current inflation so its response will depend on where it sees inflation heading. The jobs market remains strong, and near-term activity data has been holding up, but there are encouraging signs on both market and household inflation expectations, and also corporate price plans which suggest inflation may not be as embedded as some in the market fear."
USD forecasts and analysts' views
With inflation elevated, the Fed set to continue hiking and economic growth slowing, what are analysts' USD predictions?
In their USD forecast on 15 September, Francesco Pesole at ING Group's analytics arm THINK saw continued support for the US dollar performance. He said:
"...markets have continued to push their hawkish bets on the Fed tightening further, and with 75bp fully priced in for next week's meeting, March 2023 Fed Funds futures now trade at around 4.50%. This marks a 50bp+ increase in peak rate expectations since the start of September, which has translated into a 40bp rise in two-year Treasury yields.
"Ultimately, we're observing a textbook FX reaction to the US yield curve inversion: a supported dollar, and heavily impacted pro-cyclical/commodity currencies; dollar-bloc currencies are down 1.6-2.1% in the week, and only NOK has performed worse (-2.5%) versus the USD. Slumping oil prices (third consecutive weekly drop) are all part of the equation and are mirroring how markets are factoring in a more aggressive tightening by central banks materially hitting global demand.
"In such an environment, risk sentiment is struggling to recover and this is just another factor delaying any correction in the dollar...We see the dollar staying on solid ground into Wednesday's FOMC announcement."
Citibank's wealth management arm in Hong Kong said that the dollar was unlikely to show further rapid growth in the short term, with the DXY likely remaining around its current level:
"In the interim, US rates may continue to be caught between inflationary concerns and cycle-turn/recessionary fears which implies a more range-trading backdrop for US longer dated yields. It is difficult to see DXY revisiting recent highs (109.00 handle), more likely, sentiment may increasingly turn to sell USD on rallies especially vs safe havens such as JPY as US recession risks build, but also against selected risk currencies such as AUD as UST yields are capped.
"For now, a limited move to the 104.00–105.00 handle seems more likely, with investor concerns about Europe likely limiting further downside."
Analysts at HSBC were also bullish towards the US dollar trend. In their US dollar forecast, they said:
"The US Dollar Index (DXY) has been on an uptrend since June 2021 and is showing little sign of coming to an end. The outlook for the Federal Reserve's (Fed) policy and global growth are likely to prove USD supportive over the short to medium term."
Algorithm-based prediction website WalletInvestor suggested the US dollar index could rise slightly to 110.931 by the end of the year in its USD forecast for 2022.
In its USD forecast for 2025, the service expected a rise to 116.644 by the end of December. Although the service didn't provide a USD forecast for 2030, its five-year outlook for the DXY index had it reach 119.209 in mid-September 2027, following the bullish trend.
EUR/USD forecast: Will USD strengthen against the euro?
The EUR/USD fell to parity for the first time in 20 years last month, owing to the eurozone's vulnerability to the Ukraine crisis. Europe is very dependent on Russian energy, supplies of which are in jeopardy as Vladimir Putin has weaponised gas supplies, sending prices higher and contributing to concerns about inflation and stagflation.
However, more recently, and with inflation at a record 9.1% in August, the European Central Bank (ECB) has adopted a more hawkish stance.
The ECB increased all three key interest rates by 75 basis points on 8 September. The bank's increasingly aggressive outlook lifted the EUR/USD to 1.0122 on 12 September, but the pair has since retreated to parity level ahead of the Fed's upcoming meeting.
With the eurozone heading towards a likely recession, the window for hiking rates could also be narrowing.
What is the USD future prediction against EUR?
EUR/USD live chart
Analyst Francesco Pesole at ING was bearish toward the euro, considering parity more likely than a rise above the $1.00 level in the near future:
"The euro has displayed a reduced sensitivity to ECB communication recently and the unstable risk environment mixed with a strong dollar may keep EUR/USD upside capped for now despite the recent decline in gas prices. The 1.0000 level could remain an anchor over the coming days."
On 18 August, analysts at Danske Bank forecast EUR/USD to gradually move lower and trade below parity in 12 months' time:
"We maintain our forecast profile for EUR/USD and expect the cross to move lower to 0.95 in 12M on the back of a combination of a substantial negative terms-of-trade shock to Europe vs US, the coordinated tightening of global financial conditions, broadening USD strength and downside risk to euro area economic growth."
Analysts at Sweden-based SEB Group were not as pessimistic as their colleagues at Danske. In a market summary on 16 September, they highlighted that parity was an important psychological barrier, which could take a while to breach:
"EUR/USD has fluctuated around parity in September. A drive higher by expectations on a hawkish ECB and Fed closer to a peak were sharply replaced as US August CPI surprised on the upside. The zigzagging indicates that parity is a psychological barrier and that USD positive factors as well as speculative positioning are becoming stretched. This indicates that it could take a while before a new and longer lasting push below parity is achieved."
Capital.com analyst Piero Cingari weighed in on the ECB's and Fed's impact on the EUR/USD pair in an analysis on 12 July. Both banks have since been on the same policy trajectories, with the Fed outpacing its European counterpart in monetary tightening, and thus lending the USD support over EUR:
"From a fundamental perspective, broadening US-Europe rate differentials, reflecting contrasting monetary paths by the Fed and ECB, may thus continue to put downward pressure on the EUR/USD pair in the near future. To alter the fundamental picture, there must be a marked decline in inflation in the United States, which would lower the pressure on the Federal Reserve to raise interest rates, or evidence of recession in contrast to labour market indicators."
GBP/USD forecast: Is the USD expected to rise against the GBP?
The pound sterling has steeply declined versus the US dollar in recent weeks, falling to its lowest level in more than 37 years on 16 September – the 30th anniversary of 1992's Black Wednesday. Sterling has lost 17% of its value since the start of the year.
GBP/USD live chart
What is the future dollar value prediction against the British pound?
Fiona Cincotta, senior market analyst at City Index, believes that GBP/USD could struggle to move much beyond $1.20, commenting on the currency pair in August:
"The Fed is considerably more hawkish than the BoE and UK politics are also acting as a drag on sterling. That said, a 50 basis point hike from the BoE in August could help keep GBP/USD supported."
Cincotta's forecast proved to be correct, as the BoE announced its biggest interest rate hike in 27 years in early August, taking borrowing costs up half a point to 1.75%. The bank's Monetary Policy Committee believes the UK will enter a recession in Q4 2022, and that the recession will last five quarters.
"GDP growth in the United Kingdom is slowing. The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe. The United Kingdom is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative," the BoE said in its latest Monetary Policy Report.
The market is currently expecting a 75 basis point hike from the BoE on 22 September – the British central bank's meeting will come a day later than the Federal Reserve. Both meetings will be key in determining the direction of the currency pair.
In a FX snapshot on 16 September 2022, ING's Francesco Pesole shared Cincotta's opinion, commenting that a hawkish BoE could prop up sterling:
"Despite the seemingly unstoppable re-pricing higher in Fed rate expectations, the BoE's pricing has stalled, now around 65bp for the September meeting. We currently see a relatively high chance of a 75bp move next week, which could lend sterling some help, despite a general environment that remains rather unwelcoming for pro-cyclical currencies, and domestic growth fears that is likely set to keep a lid on a large GBP recovery."
Conversely, Capital.com analyst Piero Cingari recently opined that the upcoming rate hike by the BoE would likely do little to support the pound:
"The anticipated rate hike by the Bank of England may not be sufficient to significantly reverse the pound's downward trend.
"Even if the BoE hikes interest rates by 75 basis points on Thursday 22, as I expect, this move won't reduce rate differentials with the Federal Reserve, which will likely deliver a similar hike a day earlier. Additionally, GBP/USD has already started to decouple from its correlation with short-term interest rates between the UK and the US.
"This means that in the currency market, investors are beginning to factor in downside risks other than rate differentials for the pound, such as the likelihood of inflation spiralling out of control and necessitating emergency interest rate hikes from the BoE. As UK real interest rates remain close to record lows of -8%, the market is likely to test the BoE's ability to deliver outsized interest rate hikes in the coming period."
Scotiabank's Chief FX Strategist Shaun Osborne was bearish on GBP/USD in his latest daily foreign exchange update on 19 September:
"Sterling is down 0.5% against the stronger USD on the session, in keeping with the broader USD gains. Event risks for the GBP are back-loaded into the latter part of the week, with the BoE policy decision Thursday (50bps expected by economists while market pricing indicates +75bps), and Chancellor Kwarteng's mini-budget Friday in Parliament which is expected to reduce National Insurance charges and perhaps cut business taxes. Given market pricing, the biggest risk for the GBP this week perhaps lies in the MPC disappointing market expectations."
According to the latest figures from TradingEconomics, the GBP/USD pair could be priced at $1.12599 by the end of this quarter and $1.07998 in 12 months' time, according to the platform's global macro models, projections and analysts' expectations.
When looking for US dollar predictions vs other world's major currencies, it's important to bear in mind that analysts' price targets can be wrong. Analysts' USD projections are based on USD technical analysis and a fundamental study of currency pairs' performance. However, past performance is not a guarantee of future results.
Do your own research and always remember your decision to trade depends on your attitude to risk, your expertise in this market, the spread of your investment portfolio and how comfortable you feel about losing money. Never trade more than you can afford to lose.
FAQs
Why has the USD been rising?
The US dollar is strong because it is the world's reserve currency and one that investors seek out in times of geopolitical instability. Furthermore, with inflation at a 40-year high, the Fed is expected to tighten monetary policy quickly.
However, fears that the Fed could tip the US into a recession have pulled the USD off its 20-year high.
Will USD go up or down?
The USD has been rising on safe-haven flows and bets of a more hawkish Federal Reserve. The ICE US Dollar Index (DXY) is trading 20-year highs. If the Fed hikes too aggressively, the US could fall into a recession which would pull the USD lower.
When is the best time to trade USD?
The best time to trade USD is around 8am ET (UTC –5) to 12pm ET (UTC –5). This is when most US economic data is released.
Is USD a buy, sell or hold?
The USD has been a buy as the Federal Reserve raised interest rates more aggressively than other central banks. The USD performance depends on the Fed's ability to continue growing rates at a fast pace, which is starting to look questionable.
What determines the value of the dollar?
The Federal Reserve monetary policy stance principally determines the USD performance. If the Fed hikes interest rates, the USD is expected to rise. If it cuts rates, the USD market could fall. Other factors, such as safe-haven inflows or outflows, can also influence the value of the US dollar.
Why has USD been getting stronger?
The USD has been rising owing to expectations that the Federal Reserve will act aggressively to rein in 40-year-high inflation. However, as concerns rise over a recession in the US, the outlook for the USD has eased slightly. Whether the US dollar trends higher still depends on the market being confident that the US can avoid a steep economic downturn.
Further reading
Source: https://capital.com/usd-forecast
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