The GBP/USD price outlook for 2024 is challenging due to uncertainty and several factors such as the potential of an economic recession in the UK or US, shifts in central bank monetary policies, and upcoming elections in both the UK and US.
After reaching a four-decade low in 2023, the GBP/USD has managed to recover. On the other hand, the greenback has faced headwinds due to the divergence between the Federal Reserve’s (Fed) and the Bank of England’s (BoE) monetary policies. Additionally, economic troubles and UK election uncertainty may put a damper on the pound.
What are the factors that have influenced GBP/USD in 2023?
Despite worries of a recession on the horizon, high inflation and the Bank of England’s aggressive tightening in the first half of the year, the GBP/USD managed to remain stable and gained in the second half of the year.
- Sticky inflation
The UK’s inflation remained stickier than other major economies’ inflation. The Consumer Price Index (CPI) reached 10.1% in January, and despite slowing a little bit in the third quarter, it remained above the BoE’s 2.0% target. The slowdown of wage inflation in Q3 suggested an easing of inflationary pressures in the labour market, with earnings excluding bonuses growing at 7.3%, down from 7.8% in the previous quarter.
- Monetary policy divergence
While both the Fed and the BoE have remained hawkish and extended their tightening cycle, in 2023 the Fed turned dovish, while the BoE maintained its hawkish rhetoric. After the Fed’s 11 interest rate hikes since March 2022, the US central bank decided to pause in June. Concerns about the effects of monetary policy tightening on the economy, cooling inflation and loosening job market conditions have led the Fed to abandon its hawkish stance. On the other hand, the BoE delivered 14 consecutive hikes in September, and at its June meeting, raised rates by half a percentage point, surprising markets. The BoE announced a 25 bps rate hike in August and reiterated its rhetoric of higher interest rates for longer.
- US Treasury bond yields
Despite the Federal Reserve’s rate hikes, the US economy remained strong, pushing US Treasury bond yields to a 16-year high in October. Robust economic data in the final quarter reduced 2024 rate cut expectations and boosted the potential for another rate hike, helping the 10-year Treasury yield go above 5.0%. However, easing inflation pressures and fears of a potential economic slowdown increased the chances of Fed rate cuts in early 2024, prompting a correction in Treasury yields and weakening the greenback.
What will move the GBP/USD in 2024?
A recession on the horizon?
In the US, markets expect that the Federal Reserve may start cutting rates rate sooner than anticipated due to concerns about a slowing economy. Despite a solid 5.2% growth in the third quarter, there are worries that the Fed’s aggressive rate increases may impact the economy negatively. In the UK, the economy is facing the pressure of increased borrowing costs, but recent fiscal stimulus announced by Finance Minister Jeremy Hunt might offer some support. Despite this, there are concerns that the UK may experience a mild recession toward the end of the year due to the delayed impact of rate increases.
The Fed is expected to cut rates 3 times in 2024
Federal Reserve Chair Jerome Powell indicated a potential shift towards rate cuts after the December meeting. The Fed’s Statement of Economic Projection suggested an estimated 75 bps of rate cuts in 2024, with a projected 2.4% inflation by next year’s end. However, markets are more dovish, anticipating 150 bps of rate cuts for the year, with a high probability of a March rate cut according to CME Group’s FedWatch tool. On the other hand, in the UK, money markets have priced in four 25 bps rate cuts starting from the summer, potentially reducing the key rate from 5.25% to as low as 4.25% by the end of 2024. Goldman Sachs expects the BoE to announce its initial rate cut in June and anticipates 25 bps cuts until it reaches 3.0% in June 2025.
Will Trump get re-elected?
In both the US and the UK, upcoming general elections are expected to create significant volatility to the GBP/USD pair. After 13 years of Conservative governance in the UK, Prime Minister Rishi Sunak is expected to call a general election in 2024, possibly earlier than anticipated, given recent tax-cutting measures. In the US, the Democratic and Republican primaries are set to begin, with expectations of a contentious rematch between President Joe Biden and former President Donald Trump. Biden’s approval ratings, affected by doubts regarding his handling of economic and immigration issues, have reached a low of 33%, while polls indicate Trump leading in crucial swing states for the 2024 election.