2024 Currency Outlook – Pivotal Year Ahead
Monday 8th January 2023 – 07:00 (GMT)
GBP
The second half of 2023 saw GBP weaken as concerns over spiralling inflation and rising interest rates dented market confidence. However, falling consumer and producer prices, coupled with better-than-expected economic output, meant GBP finished the year as the best performing G10 currency.
The Bank of England gave its strongest signals yet that it was finished with its current interest rate cycle and markets have already priced in aggressive rate cuts during the first half of 2024. The current base rate sits at 5.25% and projections anticipate this to fall to 4.8% by July.
Geo-political risk is also expected to drive exchange rates, with a General Election widely expected at some point this year. New rules requiring ID for voters to cast their ballot could lead to a chaotic poll day with unpredictable results.
Fundamental UK economic data was also surprisingly resilient in the latter part of 2023 with strong service sector, unemployment and wage growth contributing towards bullish GDP readings. This trend is expected to continue in the early part of 2024 and should help boost GBP demand.
USD
The US dollar has remained strong since the pandemic plunged the global economy into uncertainty and risk-aversion swept markets. The Federal Reserve’s faster pace of interest rate hikes also helped push GBP/USD and EUR/USD to historic lows in 2022, seeing some retracement in 2023.
This more aggressive approach helped US inflation fall at a faster pace and enabled a quicker economic rebound. Construction and services were particularly buoyant, with lower interest rates now needed to help these important sectors continue this trajectory.
Fed officials surprised markets in December by indicating they expected to make three quarter-point cuts over the course of 2024. Ahead of the meeting, their projections were expected to hint at two cuts.
Conversely, recently released minutes of the US central banks latest meeting showed most Federal Reserve officials wanted to keep borrowing costs high “for some time”, adding to doubts that the US central bank is poised to begin cutting interest rates as early as March.
Also expect early polling for the US presidential race to de-stabilise USD demand in the short-term. Due to take place on November 5th, electoral years have historically weakened the Greenback, however a pro-business candidate could buck this trend.
EUR
It was another mixed year for the euro as easing energy pressures and falling inflation were counterbalanced by the ongoing conflict in Ukraine and growing Euroscepticism.
There is growing support for pro-leave political parties which threatens to de-stabilise euro demand in 2024. Following the Freedom Party (PVV) winning the largest number of seats in Dutch national elections, Victor Orban’s long-standing reign in Hungary, far-right Giorgia Meloni in Italy and Robert Fico’s pro-Putin party in Slovakia – there is now a solid bloc of Eurosceptic parties in power across Europe.
Against this backdrop, the European Central Bank is now expected to start cutting interest rates by the second quarter of 2024 – with policymaker’s keen to be perceived as taking decisive action, especially when compared to their post-pandemic response.
Concerns over Europe’s largest economy, Germany, remain as its sluggish manufacturing and GDP output in the latter part of 2023 sparked a broader euro sell-off. Other surveys like the ZEW economic sentiment index have also risen off their pessimistic lows from September 2023 but are still relatively bearish.
The euro is likely to exhibit mixed fortunes in Q1 of 2024 as the currency appears on track to register gains against the US dollar but could lose out against sterling. Economic data provides green shoots of hope into 2024 if the EU can avoid a recession like it has during 2023, albeit only just.
The December 2023 ECB staff forecasts point to a 0.8% GDP growth rate in 2024, however, we could still have two successive quarters of negative growth in that time. Another possibility is that the EU is already in recession as we await Q4 GDP results after a 0.1% contraction in Q3.
Bank Predictions
A majority of major banks are predicting GBP/USD to move higher throughout 2024 as risk appetite returns to global markets:
The GBP/EUR outlook is more range-bound as concerns over both the BoE and ECB’s ability to cut interest rates remain:
Summary
Expect interest rate speculation and politics to be the main drivers of exchange rates over 2024, with some central banks expected to begin reducing levels in the first half of the year. Geo-political risk will also dictate near-term volatility during crunch elections in the US, and a potential General Election in the UK.
Trading ranges are anticipated to remain wide, and businesses can take advantage of any momentary spikes using firm orders that automatically book exchanges if target levels are reached. They provide a great way of navigating volatile markets and work well when combined with a wider currency purchasing strategy.