What to expect from GBP in 2023

Hi everyone,

 

The general consensus so far looks like a potential struggle for GBP in H1 and then growth in H2 for the year ahead. A slower, but similar performance to how £-€ rates traded in 2021 is the predictable model thus far. A challenging start to the year would be an obvious assumption to make for Sterling in 2023, the question is how long will the downside risks last?

 

The chances are very real that the BoE will be the 'first-in, first-out' in terms of this global hiking cycle of interest rates. Two MPC members voted to keep rates unchanged last month and with inflation falling, as-well-as the BoE being a reluctant hiker anyway, this poses a concern to GBP near-term. 

 

It's true much of the negative news surrounding the UK has already been priced into the Pound's current value. However, the vulnerabilities of the UK housing market for instance has yet to be realised, which could be a cocktail for disaster as the year goes on. A mortgage reset looks likely, as consumers feel the pressures from the cost of living crisis, higher interest rates and a fall in real incomes. 

 

'Recession' will be the word of the year in 2023 and a global one will be the main driver in markets it seems. The worse it is, the harder it will hit the Pound. The BoE have already confirmed that the UK is in a recession and it faces the longest one since the 1930's. UK growth is also forecast to underperform all the G10 countries this year. For this reason alone, the bet would be for a sluggish start for Sterling. 

 

As a services nation and with a large current account deficit, the Pound is firmly a high-beta currency. Global risk sentiment therefore will too (once again) be a main driver for GBP. The UK's trade deficit is the largest of any G7 country and currently is the worst on record. It means the UK is not seen as an attractive destination for foreign loans and investments (a major part of the economy). The Government's credibility over how it manages public finances is also still questionable. 

 

So the ranges as it stands for H1 are around £-€1.08-1.15 & £-$1.15-1.25 mid-market. H2 shows improvement to £-€1.10-1.17 & £-$1.20-1.30.

 
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