The British pound (GBP/USD) steadied around the $1.21 level on Thursday, ending a series of consecutive declines, although it remains close to its weakest point since mid-March. This stabilization follows the release of a survey indicating UK business activity in September was less subdued than initially anticipated.
The final S&P Global/Cips UK services PMI business activity index, which assesses the sector's health, registered at 49.3 last month. This figure represents a marginal decrease from the 49.5 recorded in August but is notably higher than the preliminary estimate of 47.2.
Following the publication of the preliminary PMI estimate on September 22, the pound dropped to a six-month low against the dollar due to concerns of an impending UK recession. The pound was the worst-performing currency in the G10 in September, with strategists showing little optimism for the rest of the year.
Investors have also been digesting a range of economic data that presents a mixed picture of the U.S. labor market. In August, the unexpectedly higher number of job openings in the US, reaching 9.61 million, suggested resilience. However, the latest ADP report showed that US private employers only added 89,000 jobs in September, marking the lowest figure since January 2021.
Markets are also assessing indications of diminishing inflation in the UK, which has implications for expectations regarding the Bank of England's (BoE) interest rates. In September, the central bank chose to keep interest rates steady at 15-year highs but reiterated its commitment to further policy tightening if deemed necessary.
“The Bank of England is, amongst the G10 central banks, probably in the hardest position,” Jim McCormick, macro strategist at Citi, told CNBC’s “Squawk Box Europe” on Wednesday.
“They need to balance an increasingly weaker growth outlook with very sticky high inflation. I think part of sterling’s weakness is less pricing for Bank of England going forward, I think part of it is this recognition of low growth and high inflation, and I do expect sterling to weaken further from here.”
Sterling fell 3.75% against the dollar in September, registering a decline not seen since the end of last summer.
According to a recent piece by CNBC, research group Capital Economics forecasted the pound to dollar rate to fall to $1.20 by the end of the year. The decline was projected more due of the global landscape, rather than because of expectations of lower interest rates versus the U.S. or eurozone.
“When U.K. interest rates are eventually cut late in 2024, we suspect rates will be reduced further and faster than investors expect,” economists Ashley Webb and Joe Maher said in a note.
The analysts added that they saw the BoE cutting rates to 3% in 2025, compared to the current expectation of 4.5% by the end of 2025.
Michael Cahill, G10 FX strategist at Goldman Sachs, was equally downbeat on the pound and forecasting a trade below $1.20.
“It’s back to Fall and we are PSL’ing — Predicting Sterling Losses,” Cahill said in a note. He said that is primarily because the BOE’s latest decisions have shown a dovish bent tilt that prioritizes growth and recent developments over the bigger picture.
“Either they add less restriction over time because they allow for more inflation tolerance, or the recent cyclical data are a genuine sign of more of a cyclical downturn than we think. Both are negative for the currency,” Cahill said.
The GBPUSD forecast from Rabobank were even more bearish than Capital Economics and Goldman Sachs — analysts at the bank saw scope for cable to fall to 1.19 in the next three months:
The pound also slid 1.26% against the euro (EUR/GBP) last month, notching its weakest performance since December 2022.
Rabobank issued its euro to pound forecast in the same note:
“While we see scope for USD strength to push cable lower on a three-month view, we continue to see the risks facing the EUR and GBP as better balanced. EUR/GBP failed to push above the top of its range last week with the 200-DMA in the 0.8708 area remaining intact. We continue to favour selling rallies to this level and see scope for EUR/GBP to move lower within its range on a three-month view given the growth clouds gathering over Germany.”
On October 2, economists at ING published a broadly similar projection, saying the euro to pound rate would remain within the 0.86-0.87 range in October:
“EUR/GBP is settling into a 0.8600-0.8700 range and that may be the story for the majority of October. There are only a few inputs ahead of the next BoE meeting on November 2nd, where we look for unchanged rates at 5.25%. One such input is Thursday's release of the BoE Decision Maker Panel survey, which we think will show a further easing in price pressures. This could prove mildly sterling negative in that the market is still pricing 18 bps of further BoE tightening over the coming months.”
Given that the pound was the worst-performing currency in the G10 last month, MUFG didn’t hold back in its projections, and issued a highly bearish forecast on both GBPUSD and EURGBP:
“We suspect the BoE has already overdone it with tightening and see potential for rates to soften relative to other major developed economies.
We see GBP underperformance from here and in circumstances of a weakening dollar, weakness will be more evident versus EUR.
EUR/GBP – Q4 2023 0.8600 Q1 2024 0.8750 Q2 2024 0.8800 Q3 2024 0.8850
GBP/USD – Q4 2023 1.2150 Q1 2024 1.2570 Q2 2024 1.2730 Q3 2024 1.2660.”
At the time of writing, GBP/USD traded flat at $1.2134 , while EUR/GBP was trading at 0.86 (up 0.13%), according to MarketWatch data.
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