Pound Sterling Outlook 2024: 1.23 by Q1

December 23, 2023 - Written by John Cameron

STORY LINK Pound Sterling Outlook 2024: 1.23 by Q1

According to the latest forecasters at Rabobank, the British Pound Sterling (GBP) could be tipped to "retreat" from today's levels against the US Dollar (USD) in the next three months, touching lows of 1.23 by end of March 2024.

UK GDP Data Triggers More Aggressive BoE Rate Cut Calls, GBP/USD Exchange Rate Held Around 1.2700

November UK retail sales data was notably stronger than expected, but markets tended to focus on GDP revisions and the Pound was unable to make further headway.

Following the data, money markets are pricing in 140 basis points of rate cuts for 2024 with the potential for base rates at 3.75%.

Markets are also pricing in aggressive Fed rate cuts and The Pound to Dollar (GBP/USD) exchange rate traded just below 1.27 in Europe.

The Pound to Euro (GBP/EUR) exchange rate was subdued around 1.1530.

Seasonal factors should provide near-term Pound support and limit any selling pressure.

Rabobank, however, sees scope for GBP/USD to retreat to 1.23 on a 3-month view.

Third-quarter GDP data was revised to -0.1% compared with the previous estimate of no change.

According to ONS Director of Economic Statistics Darren Morgan; “The latest data from both our regular monthly business survey and VAT returns show the economy performed slightly less well in the last two quarters than our initial estimates. The broader picture, though, remains one of an economy that has been little changed over the last year.”

Second-quarter GDP was revised to 0.0% compared with the previous estimate of 0.2% growth.

Although only a small revision, it increases the risk of a technical recession and 2023 GDP is set to be stagnant at best which could be psychologically important.

Retail sales volumes rebounded 1.3% for November compared with consensus forecasts of a 0.4% increase and the October data was revised to no change compared with the flash estimate of a 0.3% decline.

There was a marginal 0.1% annual increase compared with a revised 2.5% decline the previous month.

Sales still declined 0.8% in the three months to November from the previous three months.

Non-food store sales jumped 2.3% on the month amid evidence of Black Friday discounting.

Investec economist Ellie Henderson commented; “The national accounts release indicated an economy which is progressing slower than was first reported, making a winter recession far more likely, but the retail sales report for November sprinkled a little bit of festive cheer, blasting past consensus.”

Richard Carter, head of fixed interest research at Quilter Cheviot added; “Growth is weakening and interest rates are really beginning to bite and while a recession has just been avoided to date, there is no guarantee one will be avoided in 2024. You just have to look at October’s -0.3% reading to see that growth is trending further in the wrong direction.”

He added; “Inflation has eased more than anticipated and interest rate predictions are suggesting more easing than originally thought in 2024, but the damage may already have been done.”

According to Ashley Webb, UK economist at Capital Economics; “But whether or not there is a small recession, the big picture is that we expect real GDP growth to remain subdued throughout 2024.”

Credit Agricole sees limited Pound selling; “As long as markets do not shift to expect an even more dovish BoE, GBP weakness may not have much longer legs into 2024.”

The dollar overall has also remained on the defensive with the Euro to Dollar (EUR/USD) exchange rate nudging above the 1.1000 level which will help underpin GBP/USD.

There are expectations of substantial Fed rate cuts in 2024 with the highest probability that rates will be cut 150 basis points by the end of next year.

MUFG cautions over further dollar selling; “The Fed would have to start fearing the risk of a hard landing for them to need to cut by more than 150bps – that’s a risk of course but evidence of that doesn’t exist at this juncture and hence the downside for yields from here looks a lot more limited.”

It added; “While the dollar could still extend further weaker due to momentum and positioning in a low-volume market, from a fundamental perspective further dollar selling from here could prove more difficult.”

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TAGS: Pound Dollar Forecasts