Pound to Dollar 2024 Forecast Ranges: 1.18 or 1.30 by End of Year?

January 14, 2024 - Written by Frank Davies

STORY LINK Pound to Dollar 2024 Forecast Ranges: 1.18 or 1.30 by End of Year?

HSBC forecasts that the Pound to Dollar exchange rate will slide to 1.18 at the end of 2024.

NatWest, however, expects a limited net gain for GBP/USD to 1.30.

GBP/USD found support on dips during the week amid a decline in US yields, but secured only a marginal net gain to 1.2740.

There were geo-political concerns following US and UK strikes on Houthi rebels, but overall risk conditions held relatively firm, limiting Pound selling potential.

As far as UK data is concerned, UK GDP increased 0.3% for November after a 0.3% decline the previous month and compared with expectations of a 0.2% increase.

On a 3-month basis, however, GDP declined 0.2% from the previous three months and compared with expectations of 0.1%.

According to HSBC; “How much solace GBP might take from a November gain is questionable given GDP for Q4 as a whole is likely to be non-existent. In similar fashion to the EUR, the data may simply further question the merit of GBP’s Q4 23 rally against the USD.”

The Bank of England (BoE) will have a narrow path to balance growth and inflation risks.

HSBC added; “GBP bulls will hope lower interest rates can come to the economy’s rescue, with 125bp of easing priced in. But with core inflation above 5% and services inflation above 6%, it seems the BoE may need to continue choking off demand to get inflation back to target. It is not a happy mix for the currency.”

According to Wells Fargo; “The risk of more gradual Bank of England easing than currently expected by market participants could see U.K. bond yields drift higher from current levels.”

It added; “Higher bond yields and gradual easing could also see moderate gains in the pound against the U.S. dollar as 2024 progresses, especially if—as we expect—the U.S. economy moderates and the Fed eases monetary policy as well.”

NatWest considers that the Pound is now in a different state of equilibrium. It noted; “For the first time in several years, we see no excessive UK risk premium that needs to be corrected for over comings quarters.”

NatWest added; “Sterling has tracked nominal yields over the past year and the UK is expected to have one of the highest yields in the G10 over the coming 9 months, with the first BoE cut expected next August.”

Despite weak UK growth, NatWest concluded; “The outlook is still one of modest gains for GBP/USD, primarily on our expectations that the Fed cuts far more aggressively than the BoE this year.

Unicredit commented; “Markets are also pricing in very aggressive easing by the BoE in 2024, despite BoE Governor Bailey having warned in December that it is too early to discuss rate cuts.

It noted that forward rates are still pricing nearly five 25bp rate cuts, bringing the UK base rate back below 5.00% by June and close to 4.00% by December compared to the current 5.25%.

According to Unicredit; “By contrast, we see the BoE starting its easing cycle only in September and we expect rate cuts to accelerate in 2025, reflecting a further worsening of the British economy.

It added; Thus, repricing along the UK curve will also likely be heavier than along the US curve this year, helping GBP-USD move back to around 1.28.”

Gabriella Dickens, senior UK economist at consultancy Pantheon Macroeconomics commented; "We think the pound will continue to appreciate gradually against the dollar, as it becomes apparent the (BoE) won't reduce Bank Rate quite as quickly as markets currently anticipate."

The US consumer prices data was stronger than expected, but the dollar failed to sustain gains.

The headline US inflation rate increased to 3.4% for December from 3.1% previously and compared with consensus forecasts of 3.2% while the core rate edged lower to 3.9% from 4.0%, slightly higher than expectations of 3.9%.

After an initial blip, however, markets are pricing in around an 83% chance that interest rates will be cut at the March policy meeting which limited dollar support.

The US 2-year yield also declined sharply to 4.13% from post-CPI highs of 4.39% which undermined the US currency.

A key element will be whether US rate-cut expectations are sustained.

NatWest economists expect a quick return to neutral rates once easing starts, with the policy rate perhaps 225bp lower by the end of the year to 3.25%.

According to Rabobank senior FX strategist Jane Foley however, "In our view investors are still too optimistically positioned for Fed rate cuts."

RBC Capital Markets is slightly more confident on the US outlook; “The likelihood of an economic soft landing have increased. Avoiding a recession has always been conceivable, but the probability has lately gone up. We now assign a likelihood of 40% for a soft landing in the U.S., up from the prior 30%. Conversely, the likelihood of a hard landing – a recession – has fallen from 70% to 60%.”

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TAGS: Pound Dollar Forecasts