Q1 2024 GBP/USD Outlook 2024

GBP/USD 2023 in Review

GBP/USD rallied some 5% across 2023, making it one of the strongest-performing major currency pairs. But this wasn’t a USD weakness story; GBP performed well against other major currencies such as the EUR, JPY, and AUD.

GBP /USD’s strong 2023 was partly a recovery from a dismal 2022 when GBP/USD hit a record low. But also, the UK economy held up better than expected, exceeding IMF expectations at the start of the year of a mild recession and forecasts of being the worst-performing economy in the G7. Persistent inflation, one of the highest in the OECD, also fuelled hawkish BoE bets across the year, lifting GBP. So will GBP/USD outperform again, or is the outlook for 2024 more downbeat?

UK Economic Outlook

Heading into 2024, the economy is showing signs of struggling as GDP is weak (October GDP -0.3% MoM), inflation remains over twice the BoE target at 4.6%, and the labour market is tight as Brexit and COVID have hurt the labour supply, keeping wage growth high.

Looking out across the year, according to the OECD, the UK economic growth is expected to be lacklustre at 0.5%, the labour market relatively tight, and inflation could remain sticky. The BoE forecasts that CPI will remain above 2% across 2024 and return to 2% in the middle of 2025. A tight labour market and sticky inflation mean the BoE may not cut rates before mid-2024.

BoE

The BoE has hiked rates aggressively across 2023 to 5.25%, a 15-year high. Expectations of a tight labour market and persistent inflation mean the BoE will likely keep rates elevated for an extended period, a stance that BoE Governor Andrew Bailey reiterated at the December BoE meeting. Three policymakers even voted for a rate hike in December. The prospect of the BoE keeping interest rates high for longer is supporting the pound, particularly given that the BoE is more hawkish than the Fed. This trend will likely continue supporting the pound against the US dollar in 2024.

With inflation set to trend lower, the BoE is expected to start cutting rates in the middle of 2024, with around 100 basis points of rate cuts forecasted for the second half of next year. This could see GBP/USD struggle to sustain a rise above 1.30 and could see downward pressure on the pound later in the year.

Should UK economic data show that the economy is faring significantly worse than forecasted, attention could quickly turn from the central bank's positioning to the deteriorating economic outlook and pull the pound lower. Meanwhile, persistently stronger than forecast data could fuel more hawkish BoE bets lifting the pound.

US Economic Outlook

The US economy has proved to be resilient. Growth has eased slightly as Fed rate hikes slow the economy and cool inflation. The jobs market also remains robust. Heading into 2024, the US economy remains on track for a soft landing, although it's not entirely out of the woods yet.

According to the OECD, the US GDP is projected to grow 2.4% in 2023, and the US may experience a mild slowdown in 2024 with GDP growth of 1.5%. It is likely to be a year of two halves with potential bumps in the economy in early 2024 as the impact of the Fed’s tightening cycle continues to be felt in the real economy before a return to more normalised levels of growth in the second half of the year as inflation and interest rates fall. Inflation in the US has cooled considerably to just 1.5 times the Federal Reserve’s target. The Fed reined in its inflation forecast to 2.4% in 2024 and 2.2% in 2025, and the 2% target isn’t expected to be reached until 2026.

Federal Reserve

As expected, the final Federal Reserve meeting of 2023 saw the central bank leave rates on hold at the 22-year high of 5.25% to 5.5%. However, Federal Reserve Chair Jerome Powell surprised by adopting a more dovish stance, and the dot plot projected three rate cuts across 2024, up from two previously forecasted at the September meeting. While the Fed’s dot plot points to the first rate cut in June, the market is pricing in a 73% probability of a rate cut as soon as March.

With the US economy set to slow, inflation easing, and the Fed cutting rates, the core outlook for the USD is bearish.

_{Source: Bloomberg}

Year of elections

GBP/USD is likely to be impacted by political turbulence with PM elections in the UK and Presidential elections in the US.

A UK general election must take place before January 2026. Speculation points to the ruling Conservative Party likely to choose the months of May or October.

According to ING, in recent election years, 2017 and 2019, GBP traded with a 5% risk premium. This may be explained by Theresa May trying to navigate Brexit in 2017 and 2019 and Labour leader Jeremy Corbyn unnerving the market with his economic ideas.

However, looking back to 1997, when Tony Blair won, there was no risk premium on the pound. Given that shadow chancellor Rachel Reeves is well respected by the business and financial community, there is a chance that GBP may not trade with a risk premium in this election either.

Instead, the big question is whether the current Chancellor, Jeremy Hunt, will opt for any big fiscal giveaways before the election.

Should some fiscal stimulus be introduced responsibly and credibly, this could be considered mildly GBP positive.

GBP/USD forecast – technical analysis

After rising off 1.2040 the October low, GBP/USD has broken above its 50 SMA and falling trendline dating back to May 2021.

The pair trades caught between the 50 SMA and the 200 SMA on the weekly chart and in the middle of the overall range for the year.

Supported by the RSI above 50, buyers could look for a rise above the 200 SMA at 1.2840 to extend gains to 1.30, the psychological level, and 1.3125, the July high. This is likely to be a significant barrier in 2024.

Meanwhile, sellers could look for a break below 1.2440, the 50 SMA, to expose the falling trendline support at 1.22 and 1.2040, the October low. A break below here could bring 1.18, the 2023 low, into focus, a level that is expected to be a strong support.

_{Source: TradingView}

Written by Fiona Cincotta, Senior Market Analyst

Follow Fiona on X: @FionaCityIndex