GBP/USD 2024 Fundamental Outlook Preview

This is an excerpt from our full GBP/USD 2024 Outlook report, one of nine detailed reports about what to expect in the coming year. Click the banner at the bottom to download the full report.

GBP/USD 2023 in Review

GBP/USD rallied some 5% across 2023, making it one of the strongest-performing major currency pairs. But this wasn’t a USD weakness story; GBP performed well against other major currencies such as the EUR, JPY, and AUD.

GBP /USD’s strong 2023 was partly a recovery from a dismal 2022 when GBP/USD hit a record low. But also, the UK economy held up better than expected, exceeding IMF expectations at the start of the year of a mild recession and forecasts of being the worst-performing economy in the G7. Persistent inflation, one of the highest in the OECD, also fuelled hawkish BoE bets across the year, lifting GBP.

So will GBP/USD outperform again, or is the outlook for 2024 more downbeat?

UK Economic Outlook

Heading into 2024, the economy is showing signs of struggling as GDP is weak (October GDP -0.3% MoM), inflation remains over twice the BoE target at 4.6%, and the labour market is tight as Brexit and COVID have hurt the labour supply, keeping wage growth high.

Looking out across the year, according to the OECD, the UK economic growth is expected to be lacklustre at 0.5%, the labour market relatively tight, and inflation could remain sticky. The BoE forecasts that CPI will remain above 2% across 2024 and return to 2% in the middle of 2025. A tight labour market and sticky inflation mean the BoE may not cut rates before mid-2024.

Source: LSEG Datastream

BoE

The BoE has hiked rates aggressively across 2023 to 5.25%, a 15-year high. Expectations of a tight labour market and persistent inflation mean the BoE will likely keep rates elevated for an extended period, a stance that BoE Governor Andrew Bailey reiterated at the December BoE meeting. Three policymakers even voted for a rate hike in December. The prospect of the BoE keeping interest rates high for longer is supporting the pound, particularly given that the BoE is more hawkish than the Fed. This trend will likely continue supporting the pound against the US dollar in 2024.

With inflation set to trend lower, the BoE is expected to start cutting rates in the middle of 2024, with around 100 basis points of rate cuts forecasted for the second half of next year. This could see GBP/USD struggle to sustain a rise above 1.30 and could see downward pressure on the pound later in the year.

Should UK economic data show that the economy is faring significantly worse than forecasted, attention could quickly turn from the central bank's positioning to the deteriorating economic outlook and pull the pound lower. Meanwhile, persistently stronger than forecast data could fuel more hawkish BoE bets lifting the pound. 

What about the outlook for the Fed and the US dollar? How will elections impact GBP/USD in 2024? See our full guide to explore these themes and more!