GBP/USD rebound unlikely to continue into 2023 as economic troubles bubble

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By Yasin Ebrahim

AiVIF.com – The pound has racked up double-digit gains against the dollar since its trouncing in September, but it could struggle to take its momentum into 2023 as the Bank of England readies a downshift to a 50-basis-point hike as a winter of economic trouble bubbles.

GBP/USD, or cable, rose 0.13% to $1.227.  

“Our game plan assumes that GBP/USD struggles to hold any gains over 1.23,” ING said in a note, forecasting a “winter of discontent” to weigh on the currency.

Cable has jumped about 18% since its low in September, with about half of the gains driven by renewed confidence in the U.K.’s fiscal credibility – following the detrimental impact of former Prime Minister Liz Truss's economic policies – and the other half from dollar weakness, ING added.

But the boost from a weaker dollar is likely to run out of steam, ING says, as the Federal Reserve could remain hawkish through the first quarter of next year. The Bank of England, meanwhile, is set to revert to a 50-basis-point rate hike this week after its outsized 75-basis-point hike in November amid growing signs of a prolonged downturn.

Current market expectations call for the BoE to reach its peak rates of about 4% in 2023, with a rate cut now priced in for 2024. Morgan Stanley said last month it expects BoE to stop hiking rates in March of next year, and to cut interest rates by 150 basis points in 2024.

Data on Monday showing the U.K. economy rebounded in the fourth quarter did little to cool fears of deep and dark recession brewing in the U.K.

“While the rebound in U.K. GDP at the start of the fourth quarter was a touch firmer than had been expected, it nevertheless remained consistent with a downwards trend and reaffirmed that the economy is now probably in recession,” Daiwa Capital Markets said in a note.