- The downward performance is still the most prominent for the path of the GBP/USD exchange rate before the market holiday at the end of the year 2022.
- This paves the way for a bearish start to the year 2023.
- The price of the sterling dollar remained on the threshold of the psychological support 1.2000, which confirms the continuation of bears’ control.
- All in all, a turbulent year for the GBP is coming to a close with little evidence that 2023 will be much different.
Signs of a painful economic slowdown in the UK continue to accumulate
This is leaving analysts skeptical that the currency can extend - or even sustain - the recent bounce against the dollar. The options market is also showing uncertainty, as traders remain pessimistic for the long term. The pound sterling rose from an all-time low in September supported by a change of government in the wake of Les Truss' ill-fated tenure as leader and a weaker US dollar. But it is still down 11% in 2022 and is heading for its worst year since the Brexit vote in 2016.
Heading into next year, the scope for gains may be limited by the divergence in central bank policy, with the Bank of England looking more pessimistic than its peers. The British economy is also teetering, the budget deficit has soared, double-digit inflation has caused the biggest drop in living standards on record, curbed spending and triggered the worst industrial unrest in decades. The housing market also appears to be subject to a sharp correction. “The UK is at the forefront of economies heading into recession,” said John Hardy, FX Analyst at Saxo Bank. “The combination of the Bank of England withdrawing stimulus with further tightening and an aggressive fiscal picture could lead to further declines.
More clues to the pound's path in 2023:
Sterling erased losses caused by Truss' efforts to make massive funded tax cuts in two weeks, but it took more than two months to reverse the risks and a year to return to pre-budget levels. The slow recovery of this widely followed measure of market sentiment suggests that traders remain deeply pessimistic of the pound over the long term and that the bounce in the spot market has been based more on positioning than candid expression.
Leveraged funds turned net short on the pound in the week ending December 13, after being long previously, while asset managers held short positions, according to the latest data from the CFTC. Technically, there are mixed signals for the pound. What stands out is the so-called bearish moving average cross that is unfolding on the monthly chart, at a time when the Bloomberg Fear Greed indicator shows that the bears are still in control of the price action despite the rebound seen in the fourth quarter. This indicates that downside risks prevail for the pound in the medium term.
Overall, JPMorgan Chase & Co analysts see sterling heading back to $1.14 by the end of the first quarter, from around $1.21 now, citing their "particularly negative view" of the UK growth outlook. And the looming local elections in May could lead to more political uncertainty.
Analysts polled by Bloomberg see GBP/USD falling to $1.17 in the first quarter before a modest recovery to $1.21 by the end of 2023. Yield differentials between 2-year and 10-year swaps linked to the rate – a measure of recession risk – also indicate It led to a longer economic downturn in Britain than in its major peers. The difference between the forward and current spreads for one year indicates that the yield curves in Europe and the US will slope more than they are in Britain.
In general, the British pound could also weaken against other major currencies. Analysts at Rabobank, Commerzbank AG and TD Securities see the euro rising to 0.90 pence as early as June, from 0.88 now, as the European Central Bank ramps up its rhetoric about the need for more rate hikes, in contrast to the Bank of England's more dovish stance. . Sterling may also weaken against the GBP/JPY yen as the Bank of Japan is seen moving towards a more hawkish policy. The pair may head towards 120, according to Kate Jokes, chief forex analyst at Societe Generale SA, a level untouched in over a decade.
Ready to trade our Forex forecast? Here’s a list of some of the best uk forex brokers to check out.
