Analysts at Goldman Sachs are foreseeing a potential increase in the GBP/USD exchange rate, projecting it to reach 1.35 later this year. This positive outlook is attributed to an anticipated environment characterized by moderate fluctuations in interest rates and elevated stock prices. Despite the approaching Bank of England (BoE) meeting scheduled for February 1, these analysts express a lack of expectations for significant developments during the meeting. Instead, they foresee the likelihood of the first interest rate cuts occurring in the summer. Interestingly, the market, though desiring earlier rate cuts, may have to wait until later in the year for this monetary policy shift.
Over the past 12 months, the GBP/USD exchange rate, also known as the "cable," has experienced an upward trend from around 1.20 to 1.26. It's noteworthy that in July 2023, the rates surpassed 1.31, reflecting the market's response to the divergent monetary policies expected from the Bank of England (BoE) and the U.S. Federal Reserve (Fed) in 2024.
Goldman Sachs experts view the pound sterling as one of the strongest currencies with considerable potential for further appreciation. They base this assessment on the backdrop of market expectations for a soft economic landing in both the USA and the UK.
The analysts elaborate, stating, "We believe that the pound sterling has the most room to maneuver when the Fed loosens its control over financial conditions and strengthens arguments for a soft landing." They emphasize that if the Federal Reserve aggressively lowers interest rates, the pound should gain significant support, particularly in a stable risk environment and a thriving stock market.
Assuming no additional risk factors emerge in the financial markets, and the positive momentum on Wall Street and European stock markets continues, Goldman Sachs suggests that the GBP/USD exchange rate has the potential to reach 1.3500 by the end of the year.
The analysts highlight the ongoing scenario since early November and anticipate its continuation into 2024. They emphasize the pound sterling as one of the currencies with ample room for appreciation, especially as the market embraces the concept of a "soft landing." The upcoming elections in the UK are seen as potential drivers, capable of encouraging additional fiscal support and easing trade frictions with the EU, thereby supporting domestic economic growth, mitigating recession risks, and strengthening the pound.
Shifting the focus to ING Bank analysts, they point to another factor favoring the pound sterling's performance in the broader market. An internal survey conducted among numerous financial directors suggests that the Bank of England may be reluctant to endorse interest rate cuts in 2024. However, decreasing inflationary pressures may leave the central bank with little choice but to consider such measures.
"We expect the easing of the Bank of England's monetary policy to begin in the summer, although perhaps more gradually than the markets currently expect," note ING Bank analysts. They indicate that their survey aligns with calls for faster rate cuts in 2024, echoing expectations set by the European Central Bank and the U.S. Federal Reserve.
As of now, financial markets are pricing in nearly six interest rate cuts by the Bank of England in the coming year. However, policymakers are adopting a cautious stance in their communication, aiming to manage expectations effectively.
The analysts highlight a decline in expected corporate price rises from 7% in mid-2022 to 4.2%. However, they also note a historical inconsistency between companies' anticipated and actual price growth, suggesting a changing trend in this regard.
A significant concern for the Bank of England appears to be the sustained rise in wages. Expected wage growth for the next year remains above 5%, while the realized growth hovers around 7%, maintaining stability for over nine months. Analysts at ING Bank anticipate a gradual decline in private-sector wage growth, reaching 4-5% by the summer. Despite this, the current wage growth is considered too high for the Bank of England's comfort. Additionally, inflation in the UK is expected to linger around 6% for the next two to three months, followed by a more noticeable decrease by summer.
In summary, analysts suggest that financial markets might face disappointment, as the current pricing indicates an expectation of the first interest rate cut by the Bank of England as early as May, a timeline deemed somewhat premature by experts. ING analysts predict a potentially more gradual approach to rate cuts, expecting a reduction of 100 basis points in the coming year. The pace of these cuts, however, will depend on the speed at which inflation in services and wage growth align with anticipated trajectories.
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