Pound to Dollar 2024 Forecast Ranges: 1.20 or 1.31 Within 12 Months?

January 21, 2024 - Written by John Cameron

STORY LINK Pound to Dollar 2024 Forecast Ranges: 1.20 or 1.31 Within 12 Months?

Bank of America forecasts that the Pound to Dollar (GBP/USD) exchange rate will strengthen to 1.31 on a 12-month view amid dollar losses and a more positive UK assessment.

In contrast, HSBC expects that GBP/USD will weaken to 1.20 on dollar gains and UK vulnerability.

The UK outlook will be very important, but market confidence in the UK and global outlooks could prove to be pivotal for the Pound.

Exchange Rates UK Research brings you the latest institutional forecasts (Bank of America, HSBC, ING, BNPP, Commerzbank, MUFG) and the GBP/USD news for the week."

GBP/USD overall posted net losses for the week with a retreat to 1.2670 from 1.2745.

UK data releases were mixed while risk appetite was more fragile and market doubts whether an early US rate cut was realistic increased.

Headline UK inflation edged higher to 4.0% for December from 3.9% previously and compared with consensus forecasts of 3.8%.

The core rate also held at 5.1% compared with market expectations of a decline to 4.9%.

Following the inflation data, markets now expect four Bank of England (BoE) rate cuts by the end of 2024 compared with five cuts previously and the chances of a May move to cut rates dipped to 50% from 80% last week.

ING considers fiscal policy will be important with expectations of significant tax cuts in the March budget. It notes; “Unlike September 2022, we believe that these are credible tax cuts funded by the lower environment for debt servicing costs. They could add 0.2-0.3% to UK GDP this year and make the case for the BoE keeping rates tighter for longer.

It added; “there are growing upside risks for GBP.”

According to Bank of America (BoA); “We find ourselves in the relatively unusual position of being constructive GBP in 2024.”

The bank expects interest in carry trades will support the currency. It noted; “Even though our team has now added rates cuts for 2024, this is still below current market pricing for the BoE. If the market moves towards our scenario and the pricing out of rate cuts should be supportive for GBP.”

BoA is still mindful of potential negative factors; “The fragile state of UK public finances, current account deficits, the Spring Budget on March 6th and a looming general election are event risks that need to be considered. As a general rule, if any of these factors come to dominate the carry signal then GBP is vulnerable. This is not our base case but is a tangible risk to a broadly positive environment.”

BNPP forecasts 1.32 at the end of 2024, but added; “we view the move as driven more by USD weakness than idiosyncratic GBP strength. That said, we view the risks around our forecast as tilted to the downside. For one, a general election in 2024 would create uncertainty which as it approaches could weigh on the GBP.”

It added; “We anticipate UK growth will continue to stagnate; we expect growth to remain flat through H1 2024, with a minor contraction in Q1.”

According to Commerzbank; “the economy has so far proved to be more robust than initially feared. If the upcoming economic data paints a similar picture, the BoE will probably feel more comfortable waiting a little longer before cutting interest rates, which in turn would be positive for the Pound.”

HSBC expects only two BoE rate cuts this year, the first in August.”

Nevertheless, the bank is pessimistic on the overall Pound fundamentals.

It notes the dependency on short-term capital inflows; “This highlights, in our view, how vulnerable sterling remains to potential disruptions in short-term funding dynamics, be it because of a sharp move in interest rate expectations, political volatility or surprises to the data pulse, all of which are very possible in the UK in 2024.”

Overall risk conditions will inevitably have an important impact on the Pound.

US data was mixed during the week with stronger than expected readings for retail sales and jobless claims. There were, however, weak manufacturing surveys with a notable slide in the New York index.

Fed Governor Waller stated that the bank could move "carefully and slowly" on interest rates.

The rhetoric and overall data flows triggered increased doubts whether an early rate cut was realistic.

Markets are now pricing in 140 basis points (bps) of interest rate cuts from the Fed this year, from 165 bps a week earlier with only a 50% chance of a March rate cut.

The 10-year yield also increased to 1-month highs around 4.17%.

According to MUFG; “Waller basically has left all options on the table and hence we’d be surprised to see this rates move extend further until we have more data to provide direction.”

MUFG added; “But in the meantime, the dollar sell-off into year-end looked overdone and hence there remains scope for further dollar strength, especially on days when we see bigger jumps in yields.”

ING expects dollar losses to be delayed; “It seems like financial markets have a conviction call that 2024 will be a year of a weaker dollar. We agree. However, it looks like patience will be required over coming months given that the data and central bank communication do not yet support the kind of 150bp easing cycle currently priced for the Federal Reserve this year.”

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TAGS: Pound Dollar Forecasts