GBP-USD Exchange Rate Review: 2023
The GBP-USD exchange rate strengthened 5.6% in the first half of 2023, before experiencing downward pressure. A resurgent fourth quarter helped the pound to post its best year against the dollar since 2017.
The GBP-USD pair slumped below the 1.19 benchmark in early March in the wake of comments from central bankers on both sides of the Atlantic. This turned out to be its lowest level of the year, but it also marked the start of an irrepressible period of strength for the pound.
By the end of March, the GBP-USD exchange rate had posted its biggest monthly gain since November amid hawkish interest rate expectations.
The pound’s bull run gathered momentum in April, pushing it to a 10-month high against the dollar as positive global risk sentiment and expectation for a pause in US Federal Reserve policy tightening, combined to propel it higher.
The GBP-USD pair’s stride was broken in May when a combination of tepid UK PMI data and a strengthening dollar dragged the pound to a six-week low just above the 1.23 benchmark.
The pound soon resumed its upward march, climbing above the 1.28 benchmark by mid-June – a 14-month high – as markets bet on further BoE rate rises while scaling back expectations for the Fed.
Following another blip, after the BoE voted for a greater-than-expected interest rate hike prompting recessionary fears, the pound surged to a 15-month high against the dollar in mid-July. Cooling US inflation and red-hot UK wage growth that supported BoE rate hike expectations helped it break through 1.31 – its highest level of the year.
The GBP-USD pair’s cutting edge was eventually blunted by data showing headline UK inflation decelerated in June – a potential turning point in the UK’s battle against rising prices. This marked the start of a downward trend for the pound, as investors speculated that the figures could allow the BoE to take its foot off the policy pedal.
The pound drifted lower against the dollar in August after the BoE voted to lift interest rates to a fresh 15-year high of 5.25%, stoking fears that elevated borrowing costs would hamper UK economic growth.
It was more of the same in September, with the GBP-USD exchange rate slumping to a six-month low in the 1.21 mid-range. The damage was largely caused by market expectations that the BoE had finished hiking interest rates amid a deteriorating economy, while British inflation subsided.
The GBP-USD pair managed to find a firmer footing in October following a sustained period of downward pressure. Having touched a six-and-a-half-month low a whisker above the 1.21 benchmark at the start of the month, the pound managed to arrest a period of relentless losses against the dollar – causing the GBP-USD rate to become choppy.
This laid the foundations for an upward trajectory in November. Towards the end of the month, the pound broke through 1.27 for the first time since August on the back of hawkish Fed policy expectations in 2024, which weighed on the dollar.
After drifting towards three-week lows in the first half of the month amid contracting UK GDP, the pound surged to a three-month high after the BoE struck a hawkish tone. As expected, the UK central bank held borrowing costs steady, but three of the nine rate-setters voted for a hike – an outcome that showed the decision between holding or hiking was finely balanced. In the BoE’s subsequent press conference, Governor Andrew Bailey poured cold water on rate cut speculation, even indicating that another hike was on the cards.
The GBP-USD exchange rate closed out 2023 by hitting 1.2825 on 28 December – its highest level since 1 August – before settling in the 1.27 range. Increased bets that the Fed will slash interest rates in 2024 amid moderating inflation and a surprise drop in UK inflation combined to send the pair higher.
This capped off a more than 5% rise for the GBP-USD exchange rate in 2023.
GBPUSD: 2023 Year to Date
GBP-USD 2024 Outlook
Inflation and interest rates
The BoE held borrowing costs at 5.25% in November for the second time in a row following a prolonged run of rate hikes to tackle inflation – but they remain historically high. So, will they fall in 2024 – and drag the pound down with them?
Inflation has been easing: in October 2022 the CPI rose to 11.1% – a 41-year high – and 12 months later fell to 4.6%. But is that enough to see interest rates cut in 2024? Opinions differ.
Speaking in November, BoE governor Andrew Bailey pushed back against dovish action: “I have pushed back of late against assumptions that we’re talking about cutting interest rates or we will be cutting interest in anything like the foreseeable future because it’s too soon to have that discussion,”
However, some market analysts are forecasting monetary policy to be loosened as early as next year and be down to 4.5% by 2025 – just above the BoE’s 2% target.
Recessions
In October, the Institute for Fiscal Studies (IFS) cautioned that Britain will slide into a “moderate” recession in the first half of 2024 as borrowing costs remain historically high amid sticky inflation – a scenario that could weigh on the pound.
Meanwhile, the US economy’s resilience has raised expectations amongst economists that the Fed will deliver a soft landing, slowing inflation without pushing the economy into recession – potentially lending the dollar support.
Elections
The latest date the next UK general election can be held is 28 January 2025, meaning there’s a high chance the British public will be summoned to the polls in 2024. A Labour victory could be the best result for the pound, as the incumbent Conservative government struggles to win back the faith of global investors more than a year since Liz Truss’s catastrophic mini-budget.
The US election takes place on 5 November, with voters likely to face a choice between incumbent President Joe Biden and his predecessor, Republican Donald Trump – both are expected to emerge as their party’s candidates in 2024. If Trump is victorious, it could pile pressure on the dollar.