Previously, ING analysts have forecast GBP/USD would trade above 1.30 on a 12-month view but have shifted their forecasts this month, primarily due to a forced change in Federal Reserve interest rate expectations.
The Pound to Dollar (GBP/USD) exchange rate has hit 5-month lows just above 1.2400 this week before a recovery to 1.2475.
Much of the impact may have already been seen, limiting Pound losses from current levels.
It notes that the last three US inflation readings have been stronger than expected which will inevitably have an impact on Fed thinking.
ING now expects three Fed rate cuts at most this year and possibly only two which will support the dollar.
It expects Middle East tensions will underpin the US currency while a higher US rate profile will also hamper risk conditions and tend to be a headwind for the Pound.
As far as the UK outlook is concerned, ING does not expect that the Bank of England (BoE) will cut interest rates until August.
Once it does, start the process, however, it expects BoE cuts at every remaining meeting for the year as inflation pressures within the economy ease.
It, therefore, expects that relative yields will move sharply against the Pound which will undermine the currency.
Key Quotes:
"A rewrite of the US/Fed scenario means that we have had to cut our GBP/USD profile."
"We are still looking for four cuts this year starting in August."
"Some are looking for June – but that seems too early."
"Independent sterling moves will be driven by key UK data releases – e.g. wages and services inflation."
"These could still prove a little sticky but should be falling sharply by the summer."
"We do not see a UK election (probably Oct. or Nov.) having a big say on sterling."