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Goldman Sachs: Pound Sterling Tipped at 1.35 vs Dollar in 12 months

December 24, 2023 - Written by Frank Davies


Goldman Sachs now expects that the Pound will strengthen to 1.35 against the US Dollar by the end of 2024.

HSBC analysts, however, are forecasting that GBP/USD exchange rate will weaken to 1.18 by the third quarter of 2024.

There was choppy GBP/USD trading during the week with net gains to above 1.2700 as the dollar lost ground.

The UK data releases this week triggered a further shift in bank of England interest rate expectations.

The Pound lost ground, but was rescued by a further slide in the US dollar amid expectations of deeper US rate cuts. Stronger risk conditions also helped underpin the UK currency in global markets.

The headline UK inflation rate declined more sharply than expected to 3.9% for November from 4.6% previously and significantly below consensus forecasts of 4.4%.

The core rate also declined to 5.1% from 5.7% and below expectations of 5.5%.

In response, money markets moved to price in interest rate cuts more aggressively with the first move now seen in May and rates declining to below 4.00% at the end of next year.

According to MUFG; “It had previously been thought that persistent inflation risks were greater in the UK and would continue to make the BoE relatively more cautious over cutting rates. However, there is building evidence now that inflation in the UK is also coming down quickly like in the US and euro-zone with a lag.”

It noted a report form Cornwall Insight that domestic energy bills could fall by 14% in April after the small increase in January.

The bank added; “The favourable developments are reinforcing market expectations that headline inflation could fall back to the BoE’s 2.0% target in 1H of next year setting the stage for the BoE to begin cutting rates from Q2. While it is in line with our current forecasts for BoE policy, the faster decline in inflation poses downside risks to our near-term pound forecasts.”

RBC Capital Markets noted that the BoE rhetoric has remained hawkish, but added; “The question going into the new year was how long that would be sustained for. That’s even more the case after the CPI release.”

According to Rabobank “until recently, CPI inflation data in the UK was notably firmer than in both the US and the Eurozone, and BoE policymakers were sticking to the hawkish script. The market appeared to be fairly accepting of the view that BoE rate cuts in 2024 would lag those of both the ECB and the Fed.”

Rabobank, however, expects that this narrative is under threat following the inflation data.

Although UK retail sales data was stronger than expected, GDP figures for the second and third quarters were revised lower, increasing talk of a technical recession.

According to BNP Paribas; “We anticipate that with a slowing economy, the UK will eventually enter a period of stagflation, where low growth will ultimately catalyse a greater fall in price pressures.”

The US PCE prices index declined 0.1% for November compared with expectations of no change for the month with the year-on-year increase slowing to 2.8% from 2.9%.

Core prices increased 0.1% on the month and the October increase was also revised lower to 0.1% from 0.2%.

The year-on-year rate declined to 3.2% from a revised 3.4% previously and below expectations of 3.3%.

Markets are now pricing in substantial Fed rate cuts in 2024 with over a 70% chance that rates will be cut to 3.75% or 4.00% by the end of the year and two rate cuts by May are now priced in.

Goldman Sachs are now forecasting five rate cuts in 2024 which will weaken the dollar and now forecasts that GBP/USD will strengthen to 1.35 at the end of 2024.

BNP is still broadly downbeat on the dollar; “Additionally, with Fed rate cuts supporting a soft landing narrative, and as we expect fewer rate cuts to be delivered by other major central banks next year compared to the Fed, we expect the USD to remain on the back foot.”

US data releases during the first quarter of 2023 will be extremely important.

HSBC is not confident in forecasting a weaker dollar. It notes; “Less fear of the Fed has pushed the USD lower but hurdles for this to be sustained are getting higher, amidst sluggish global growth and elevated rate cut expectations. A number of scenarios still point to a strong USD but only a global soft landing delivers a clear bear case.”

HSBC forecasts that dollar strength will contribute to GBP/USD losses.

MUFG also sees the risk of the dollar being oversold; “the US rate market is already pricing in expectations for earlier and deeper Fed rate cuts which provides a higher hurdle for further dovish policy surprises.”
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