GBP/USD outlook in 2024 to depend on general election, BoE cuts, growth concerns 

The pound to dollar currency pair (GBP/USD), widely known as “cable” in currency markets, traded at $1.27 on Friday, December 22, with sterling having gained close to 5% against the greenback year-to-date.  

As investors are now mulling over GBP to USD forecasts for the upcoming year, multiple factors are coming into view, such as the Bank of England’s interest rate reduction timeline, the speed and depth of similar cuts in the U.S., the upcoming elections in both the U.S. and UK, as well as growth and productivity concerns. 

Following a surprise UK inflation report last Wednesday, which saw inflation fall at a pace well below expectations, market expectations have shifted for when the Bank of England (BoE) may begin easing borrowing costs. The Consumer Price Index (CPI) release showed inflation in the UK dropped to 3.9% in November from the previous month's 4.6%, marking the slowest pace since September 2021. The news led to a 0.715% drop in the pound against the dollar, marking its most substantial daily decline in nearly two months. 

The BoE opted to keep rates unchanged at its last policy meeting of 2023. However, markets are now predicting approximately 140 basis points of interest rate cuts from the Bank of England throughout 2024. 

Elsewhere, a survey last Thursday revealed that British businesses have become more pessimistic about the country’s economic outlook in December. The downturn in confidence represents the most significant monthly decline in over a year, adding to concerns about a potential slowdown in the UK economy. 

2024 GBP to USD forecast: ING says cable will “struggle to sustain gains over 1.30” 

In their FX Outlook for 2024, released in mid-November, ING’s Global Head of Markets Chris Turner and FX Strategist Francesco Pesole saw a “lacklustre recovery” for the pound, with a mildly bullish forecast outlined for GBP/USD: 

“The strong dollar is again keeping GBP/USD pinned down, but compared to this time last year, the UK’s finances are seen in safer hands. This means that we are trading in the low 1.20s rather than the low 1.10s. As above, we have outlined the case for a cyclical fall in the dollar as the decline in short-dated US yields accelerates through 2024. Even though the BoE has re-introduced forward guidance on its restrictive 5.25% bank rate for an extended period, we think a lower policy rate is also likely next summer. We forecast that all of the BoE’s key inflation metrics will be heading in the right direction through 2024, allowing the BoE to deliver 100bp of easing next year starting in August. This probably means that GBP/USD will struggle to sustain any gains over 1.30”. 

ING’s GBP to USD forecast for 2024 had the pair at 1.28 by the end of the year. 

Analysts at Citibank Hong Kong’s Wealth Management division, however, were bearish on cable, as they saw the BoE cutting rates in August as opposed to May. They also cited the impact of political uncertainty, given the impending general election: 

“Strong wages and elevated services inflation should entrench a hawkish bias from the BoE. The Autumn Statement led Citi analysts to push back the timing of the first rate cut from May to August. In the medium term, political uncertainty could weigh on GBP and increase risk premia. Citi analysts also anticipate somewhat of a ‘cliff effect’ in Q3 ’24 once the UK hard data starts to turn, which suggests modest GBPUSD downside”.  
 

The bank was bearish on GBP to USD, forecasting the pair to trade at 1.31 in the next three months, and then slide to 1.23 on a 6–12-month outlook. 

Euro to GBP 2024 forecast: ING says faster BoE easing presents upside bias 

ING's Pesole and Turner were mildly bullish on EUR/GBP in their year-ahead bias, writing that the BoE would, in their view, unwind its restrictive rate policy quicker than the ECB. The analysts also questioned whether an election risk premium would be a factor, given that the financial community appeared to have a positive opinion of UK shadow chancellor Rachel Reeves.  

With that in mind, according to Turner and Pesole, a potential Labour victory may not exert as much influence over the currency pair as the speed of the BoE’s easing vis-a-vis the ECB: 

“Moving into a UK election year, the question is whether sterling requires an election risk premium and if so, why? During the last couple of elections, 2017 and 2019, sterling traded with a 5% risk premium. [...] Labour voters will be hoping that a 2024 election is more akin to Tony Blair’s landslide win in 1997. [...] Indeed, it now seems that the current shadow chancellor, Rachel Reeves, is perceived well by the financial community. Continued strength of Labour in the opinion polls does not need to damage sterling. 

Our core view here is that in an environment of lower aggregate demand and inflation moving back towards target, the BoE will ease more aggressively than the eurozone and that EUR/GBP will rise. The BoE has been criticised for the fact that the UK has had a worse inflation problem than elsewhere in the world, but in 2024 we think it will be in a position to unwind its restrictive 5.25% Bank Rate more quickly than the ECB. The risk here is that more disfunction in the eurozone in early 2024 prompts earlier ECB easing than we currently forecast (September 2024), but we doubt that this should lead to too much downside in EUR/GBP”. 

ING’s EUR/GBP forecast for 2024 saw the currency pair at 0.90 in Q3 and Q4 2024. 

At the time of writing on December 22, the GBP to USD currency pair traded around $1.2737, with sterling gaining close to 5.3% against the greenback year-to-date. The euro to GBP exchange rate stood at 0.8659, with the pound strengthening against the common currency by 2.10% over the past 12 months.