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GBP forecast

Weak UK PMIs send pound lower, increase chances of November BoE rate pause 

 

The British pound (GBP/USD) continued its multi-week decline after survey data revealed a significant slowdown in the UK economy during September, surpassing any slowdown experienced since the Covid lockdown period. 

The S&P Global Composite PMI dropped from 48.6 in August to 46.8, falling below the consensus forecast of 48.7. A reading below 50 indicates contraction. 

The findings were in line with hints from the minutes of the Bank of England's Monetary Policy Committee meeting earlier this week. These findings seemed to influence the MPC's decision to vote in favor of maintaining the interest rates at 5.25%. 

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, commented on the reading in an official press release: 
 

“The disappointing PMI survey results for September mean a recession is looking increasingly likely in the UK. The steep fall in output signalled by the flash PMI data is consistent with GDP contracting at a quarterly rate of over 0.4%, with a broad-based downturn gathering momentum to hint at few hopes of any imminent improvement.”

“With the Bank of England having had sight of the survey data prior to its latest policy decision, the worrying signals from the survey of heightened recession risk and cooling inflationary pressures are likely to have added to calls to halt rate hikes.”


As for the components of the report, services — the UK’s largest sector of the economy — saw a contraction with a PMI reading of 47.2. This figure fell below expectations of 49.2 and was lower than August's reading of 49.5. 

The manufacturing sector also stayed in contraction territory with a PMI of 44.2. However, this was slightly higher than the consensus expectation and the August reading of 43. 

"It’s another dismal outcome," James Smith, Developed Markets Economist at ING, said of the data. "We think the Bank will remain on hold in November and that August’s rate hike marked the top in this tightening cycle." 

Forex markets reacted following the release of the data, with the pound to dollar exchange rate trading at $1.226 at the time of writing, reflecting a 0.26% decrease for the day.  

The pound to euro exchange rate (GBP/EUR) saw a 0.15% decrease to trade at 1.1515. 

Both losses build on the declines that followed the Bank of England’s Thursday decision to keep interest rates unchanged

 

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GBP/USD forecast: Most analysts see further weakness for sterling 

 

Economists at MUFG Bank weighed in on the BoE’s decision and the future outlook for the pound: 

“Slim majority (5 vs. 4) of MPC members voted to leave policy rate unchanged. Decision was finely balanced but case for another hike was not as compelling. Updated guidance signals shift towards keeping rates high for longer. Modest pick-up planned for pace of QT in year ahead.

While the UK rate market has already moved a long way now to price out further BoE hikes, the Pound is still vulnerable to further near-term weakness with evidence building that the UK economy is responding more to tighter monetary policy.”

On September 22, ING’s Global Head of Markets, Chris Turner, wrote: 

“The dramatic repricing of the Bank of England tightening cycle has taken its toll on sterling over recent weeks. The market now only prices a 47% chance of a 25bp rate hike today. As our UK economist James Smith highlighted in his CPI reaction piece yesterday, the BoE may not be swayed by some of the volatile factors that drove CPI lower in August and instead, continued high wage growth may be the swing factor that sees it deliver a 25bp hike after all. That is ING's call.

A hike would provide GBP/USD with some much-needed support. If not the path to 1.2100 would be open. Equally, EUR/GBP would test the July high at 0.87 were the BoE to surprise with a pause.”

Scotiabank Chief Currency Strategist Shaun Osborne was more confident in his bearish outlook: 
 

“Weak data (and perhaps rising recession concerns) will keep the GBP under pressure after yesterday’s fall around the BoE’s decision to hold rates unchanged. New cycle lows for the GBP and strongly-aligned bear signals on the short-, medium– and long-term trend strength oscillator imply more downside risk for Sterling. Loss of support in the 1.24 zone targets additional losses to 1.21/1.22. resistance is 1.2350.”

In their latest FX Snapshot on September 18, analysts at Citibank Hong Kong said:   

“Citi Analysts’ long held view has been the GBP is an eventual sell, but that clearer evidence of both a slowing economy and inflation trajectory were needed for this to come to fruition. This is slowly becoming clearer, with cracks appearing in the labour market despite still strong wages pressures. The BoE are likely to pivot reasonably quickly once growth begins to soften. Current account dynamics and poor investment and productivity trends suggest GBP may underperform EUR medium term.”

Citi’s 3-month pound to dollar forecast was surprisingly bullish, considering the current rate of $1.22, placing the GBP/USD exchange rate at a potential average of $1.26. The 6-to-12-month forecast, however, was bearish, suggesting that the pound to dollar rate could drop to $1.19, according to the bank. 
 
Citi’s long-term GBP forecast, however, was bullish, projecting the GBP/USD pair to recover and trade at a potential average of $1.40. 

The GBP/USD forecast from Australian bank Westpac, last updated on September 22, was also bullish, and saw the pair trading at $1.27 in December 2023, $1.28 in March 2024, and $1.29 in June 2024, indicating a potential bullish trajectory for the pound. The bank is set to update its weekly forex projections next week. 

When considering foreign currency (forex) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.  

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