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Pound to Dollar December 2023 Forecast: Tough Battle to Secure Further Gains

November 26, 2023 - Written by John Cameron

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Foreign currency analysts at ING and Unicredit both consider that Pound Sterling (GBP) gains against the US Dollar (USD) will be held to 1.28 at the end of 2024.

Investment banks overall see little upside scope for the Pound to Dollar exchange rate.

Those banks that expect the dollar to weaken also expect that the Pound will lose ground against the Euro.

The Pound, however, has had a good week with generally positive fundamental developments

GBP/USD secured net gains for the week and posted 11-week highs just above the 1.2600 level on Friday.

During the week as a while, the Bank of England (BoE) had some success in pushing back against expectations of an early cut in interest rates.

Markets were also slightly more receptive to the argument for rates staying higher for longer.

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The UK PMI manufacturing index improved to 46.7 for November from 44.8 previously and above consensus forecasts of 45.0.

The services-sector index also increased to 50.5 from 49.5 which was above expectations of 49.5. This was the first return to expansion territory for the first time in four months.

Although the data indicated stagnation at best, there was fresh speculation over persistent inflation with service charges increasing at the fastest rate for four months.

In comments on Monday, Governor Bailey stated that it was much too early to be thinking about interest rate cuts and borrowing costs might need to increase again if there were signs that inflation was more persistent than expected.

In testimony to the Treasury Select Committee, Bailey also considered that risks to inflation and interest rates were still to the upside, especially given the tight labour market.

The announcement of National Insurance rate cuts in the Autumn Statement also fuelled concerns over stubborn inflation while dampening recession fears.

In comments to the Financial Times on Friday, chief economist Pill stated that monetary policy was in a difficult phase amid stubbornly high price pressures.

He added that it was important to resist the temptation to declare victory and that key indicators such as services-sector inflation and pay growth remain at very elevated levels.

Following the BoE rhetoric this week, markets are less confident that the bank will engage in substantial interest rate cuts next year.

ING noted that markets have priced out around 20bp of cuts in the September 2024 contract in the past week.

According to MUFG; “We expect weak growth and slowing inflation in the coming quarters to encourage market participants to price back in more BoE rate cuts. The OBR’s updated growth forecasts revealed that they expect growth to remain weak after incorporating the impact from the new fiscal measures.”

It added; “In these circumstances, the GBP could strengthen further in the near-term against USD, but the gains are built on shaky foundations.”

US initial jobless claims declined to 209,000 in the latest week from 233,000 previously and below expectations of 226,000 which dampened expectations of deterioration in the labour market.

Existing home sales, however, declined to an annualised rate of 3.89mn for October from 3.95mn previously and the lowest reading since 2011.

Minutes from the early-November Federal Reserve meeting reiterated that the bank would maintain a restrictive policy stance and that there were still inflation concerns.

Overall Fed Funds rate futures indicated that markets are still very confident that rates will not be increased again.

Nevertheless, the potential for a cut as early as March dipped to around 22% from 30% the previous week.

There were also net losses for US Treasuries with the US 10-year yield increasing to just below 4.50%.

Credit Agricole expects longer-term Pound losses; We expect sterling to weaken, reflecting the bleak outlook for the UK economy and the BoE easing, but more in 2025 than next year.

It added; “We do not expect the BoE to start cutting rates until 3Q24 and by 75bp to 4.50%. This will likely limit the GBP’s fall next year, leaving GBP-USD relatively stable, and not exceeding 1.28.

It forecasts that GBP/USD will retreat to 1.21 at the end of 2025

Commerzbank remains cautious over the Pound; “It is possible that even if there are positive surprises from the real economy in the UK, the market always has the BoE’s rather hesitant approach at the back of its mind. If that is the case that is likely to limit Sterling’s upside potential in the near future.”

Global risk conditions will be important for the Pound.

Nordea expects that the current optimism surrounding a soft US landing is misplaced. Either growth and inflation will accelerate again or there will be a slump in demand.

According to the bank; “The US dollar is likely to perform better in both of these dynamics compared to the current soft-landing dynamic. For the US dollar, a higher for longer dynamic is likely to result in a more advantageous interest rate differential, and alternatively a more recessionary dynamic is likely to support the dollar because of its safe-haven status.”
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