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While there have been bumps on the road, the Pound has been one of the strongest performers among major currencies in 2023. Buoyed by a hawkish Bank of England and, at times, decent economic data, GBP has been a clear winner for currency traders.
Moreover, several major forecasters are bullish in their outlook for the Pound going forward.
2024, however, is going to be an interesting year for those who trade forex pairs with CFDs and other derivatives.
Both the UK and the United States have General Elections; there are recession worries globally; and an economic slowdown in China could prove disastrous for the global economy.
Yet, GBP will face unique challenges next year. While the UK is far from being alone in facing economic uncertainty, it has a unique set of challenges to overcome.
Below, we consider five of those UK-specific bearish factors that could weigh heavily on GBP next year:
1. Housing Market and Mortgage Costs
We start with the housing market because it feels like the great unknown.
A slowdown in home sales has already started, but it will be interesting to see what happens in terms of current homeowners’ ability to pay mortgages.
Many of the pre-pandemic era five-year deals will be coming to an end in 2024, and UK homeowners must then brace for the impact of soaring mortgage rates.
The UK Government has remained cautious in offering support, although it may be forced to act in an election year, particularly as so many Tory voters are homeowners.
Nonetheless, we saw in 2008 how mortgages can be a catalyst for greater economic turmoil.
And while the UK is not alone in facing a difficult housing market – just look at China – the economy, and GBP as a consequence, may be more sensitive to it.
2. Untamed Inflation & Cost of Living
The UK has been slower at bringing down inflation than most other major economies.
Rates of inflation were more than double that of the United States (6.8% vs. 3.2%) in August 2023. But the worry, for some, is that inflation won’t stay down.
The spectre of the hawkish Bank of England has added to the strength of GBP in 2023, but there is only so far that a central bank can go, and they won’t raise rates in perpetuity.
Many believe that inflation and the cost of living crisis that goes with it have not yet fed into the wider economy.
But ultimately, they will take their toll, leading to rising unemployment, a slowing economy, and a potential recession, none of which will likely support sterling.
3. Recession
By and large, the UK economy has surprised forecasters throughout 2023, proving fairly resilient. However, warning signs have been building across the (very wet) British summer.
August’s PMI data looked particularly brutal, with PMI services falling to 48.7 and manufacturing to 42.5.
The difficulties with inflation and the cost of living, as well as the housing market, may also finally start to feed into the wider economy.
One think tank recently put the odds of a recession by the next General Election (which will take place in 2024; see below) at 60%.
Others simply believe it’s a case of when, not if. GBP might not necessarily be battered in a global recession, but there are many problems specific to the UK to suggest it could be worse hit than comparable economies. Not least the continued fallout from our next factor, Brexit.
4. Brexit Woes
An issue that many in the UK media are beginning to grapple with is that Brexit is more of a slow burn than a sudden decline.
Yes, the impact on GBP is still felt more than seven years after the Brexit vote, but there are some who maintain more pain is yet to come as a result of the divorce from the EU.
Aside from slower growth as the UK scrambles to negotiate trade deals to replace what was lost from intra-EU trade, there are other structural issues that weigh on the economy, including supply
chains.
In a poll conducted last year, eight out of ten British firms claimed Brexit was more disruptive to supply chains than the Ukraine War.
None of these factors weigh on GBP specifically, but their impact on the wider economy cannot be ignored.
5. An Election Surprise
For GBP traders, the 2024 General Election represents something of a wildcard. We expect to see a Labour government with a large majority, but what will that mean for GBP? It’s anyone’s guess.
Despite the rhetoric, it does not seem that Sir Keir Starmer’s government would be a radical one.
Indeed, it may feel like business as usual. That might play out well for the Pound, as it would point to five years of stability.
Then again, there are other factors that could weigh on GBP, including the new government’s plans for the economy. Finally, there could be an election surprise, even if most pollsters discount it.
A Conservative victory looks unlikely but that is not to say that Labour is guaranteed to have unbridled success. Anything that smacks of unstable government could lead to difficulties for GBP.
