‘Expect volatility’: How will sterling perform in 2024?
Sterling’s performance in 2024 remains up for debate following November’s sharp fall in inflation.
After inflation dropped to its lowest level in two years, traders ramped up bets that the Bank of England would start cutting interest rates in the first half of next year.
This in turn sent sterling down around 0.7 per cent, although today it clawed back some of its losses to sit around $1.2660.
Lower rate expectations tend to hit currencies as it suggests investors will receive a lower rate of return on their investments.
Traders around the world are dialling back their expectations for where interest rates will sit by the end of 2024.
“In 2024 currency markets may well be dominated by a race to the bottom, as investors place their bets on which central bank is going to cut rates first, fastest, and furthest,” Laith Khalaf, head of investment analysis at AJ Bell said.
With a fair amount of uncertainty around the likely path of interest rates, both in the UK and the US, experts are divided about how sterling will perform.
Amundi thinks the pound will fall more than four per cent against the dollar next year. “We expect the pound to fall apart,” Federico Cesarini, head of developed FX at Amundi Investment Institute, told Bloomberg.
Europe’s largest asset manager thinks that the economy will slow down by more than analysts are currently expecting.
“We have to remind ourselves that we cannot have seen the worst for the UK economy so far,” Cesarini said. “We believe the current outperformance (of sterling) is totally not aligned with recession fears”.
However, analysts at Goldman Sachs were more optimistic on sterling’s prospects in the new year.
While noting the argument that earlier rate cuts might “unnerve Sterling bulls”, the analysts argued that other trends were more important.
“The pound is a unique currency that tends to do especially well in an environment of moderating rate volatility and buoyant equity prices, which is why we think it has more room to run as the Fed loosens its grip on financial conditions and reinforces the case for a soft landing,” they wrote.
With election campaigns to come in both the US and UK next year, there remains a degree of uncertainty about the future direction of fiscal policy in both economies. This too could affect exchange rates if there is a significant fiscal loosening.
“Lord only knows what the election campaigns will do to exchange rates, but it would be prudent to expect volatility,” Khalaf said.