When there is a change in the level of people complaining about unemployment and claiming compensation benefits, it can have an impact on the local economy and the country’s currency. If work is required, and the number of employees and consumers increases, this may lead to increased spending and consumption, thus increasing the demand for services. When the demand for goods and services increases, there may be an increase in a country’s domestic production. This means that more goods and services are in the economy and thus may have a positive impact on economic growth.
Additionally, when spending and consumption increase, it can increase tax revenues, enabling its services and programs to be better funded. This may positively affect the economy in general and enhance the strength of the local currency. However, other factors that you may want to employ such as foreign trade, space or trade deficit, banking policies and factors should also be considered. Therefore, the economic situation must be comprehensively analyzed to understand the impact of various factors on the strength of the currency.
GBP Forecast for 2024 – Fundamental Outlook: Growing concerns about a full-blown war in the Middle East, combined with a hawkish shift in US Federal Reserve’s interest rate expectations, has led to a doubling of demand for the US dollar at the expense of the British pound. This fundamentally cautious environment has weighed on risk currencies such as the pound, and has been exacerbated by the Bank of England’s recent shift to a more dovish stance. It may look as if Bank of England’s monetary policy meeting in May will deliver the final repricing needed to the markets as more MPC members will vote in favor of a cut. The bank’s guidance will also make it clear that the reduction is coming.
Do we follow the Federal Reserve or the European Central Bank?
The big question for the Bank of England: Do we follow the Fed or the ECB? The Bank of England (BoE) must decide which path to follow given the global trend of major central banks considering lowering interest rates: the Fed or the European Central Bank. Economists expected the Federal Reserve to be the first to cut interest rates after it raised interest rates to 5.5%, a higher percentage than its European counterparts. However, the Fed decided to postpone interest rate cuts until at least the second half of 2024 due to strong US statistics. In contrast, the European Central Bank has indicated that it will make its own decisions, and is expected to start cutting interest rates in June.
When central banks adjust interest rates independently of each other, they run the risk of changing the relative value of their currencies. The ECB’s revised interest rate path hurt the EUR/USD pair, sending it down from the 1.0800 levels to around the 1.0600 levels. Despite the growing gap between the ECB’s and the Fed’s expectations, the Bank of England was expected to follow other central banks in cutting interest rates this year. Understandably, investors will find it difficult to believe that the Bank of England is able to cut interest rates faster than the Fed
However, this is changing. Investors are now looking at two rate cuts in 2024, with the first 25 basis point cut for August, and the odds of a cut in June are 50% versus 50%. But the consensus among economists surveyed at the beginning of April believes that the reduction process will take place in June. Therefore, further repricing of the negative GBP trend should continue considering that June is not yet “fully priced in”.
UK inflation reaches its lowest level since 2021
The inflation rate and expectations can be affected by various variations, including successful policy and economic and political developments. Overall, the Bank of England is the main source of monetary policy in the United Kingdom, and provides stabilization options in a wide variety of ways. The central bank aims to agree on specific targets, which are around 2%. The bank specifically uses its policy actions, such as adjusting interest rates, to influence the interest rate in proportion to the target.
Growth in the UK remains moderate, the jobs market remains weak and interest rate cuts will be well received by many industries as the UK economy continues to struggle. According to the latest ONS data, in the fourth quarter of 2023, the UK economy entered an economic recession. After contracting by 0.1% in the third quarter, the British economy contracted by 0.3%. Overall, GDP expanded by a very weak 0.1% in 2023. Although the fourth quarter budget is expected to increase GDP by about 0.1 percentage points. However, additional drivers for local development are still needed.
Wage growth remains strong in the UK, although slightly slower. Average income for January rose by 6.1%, a significant increase compared to the recent UK inflation rate of 3.4%. This gave UK consumers more disposable income. With an unemployment rate of 3.9%, the labor market remains strong, and economic activity for those aged 16 to 64 is increasing, although it is still higher than it was before the pandemic.
It seems appropriate for the Bank of England to propose a series of interest rate cuts this year, starting at its meeting on June 20 in accordance with the latest sterling forecasts, and given the strong economic environment that includes a rapid decline in inflation rates.
GBP/USD Forecast: The Bank of England could move away from the Fed’s path
The Bank of England is likely to cut interest rates before the Federal Reserve, as it is expected to take the first action in September. ING also believes the Bank of England’s interest rate cuts this year will be larger overall.
This would represent a slight departure from the current cycle of interest rate hikes, during which the Bank of England and many other European central banks have appeared driven higher by their increasing sensitivity to currency weakness.
ING believes that the relationship between the policies of the Fed and the Bank of England is often overstated. There are many instances where the Bank of England has deviated significantly from the Fed, the US interest rate hike cycle from 2016 to 2018 being the most recent example.
Moreover, concerns about the effects of the currency decline have likely diminished. With inflation significantly lower and likely to fall further, it is expected that the British pound has already proven to be one of the most resilient G10 currencies in the face of the recent surge in dollar strength. This provides a small amount of protection against any new weakness or inflation, in a way.
