GBP/USD Q4 2024 Market Outlook: Factors Influencing the Pound and Dollar
As we approach the fourth quarter of 2024, the GBP/USD currency pair has demonstrated a robust performance, with gains nearing 5% in the third quarter. While the pound has strengthened against the U.S. dollar, its performance against other major currencies has been mixed, experiencing declines against the yen and maintaining stability against the Swiss franc, while gaining against the euro and Australian dollar.
The recent surge in GBP/USD indicates a breakout from its previous trading range, suggesting potential for further increases as we enter Q4. A significant factor contributing to this outlook is the divergence in monetary policy between the Federal Reserve and the Bank of England.
In September, the Federal Reserve initiated its rate-cutting cycle with a notable 50 basis point reduction, marking its first cut in four years, bringing the rate down to 5.00%. The Fed's dot plot indicates expectations for two additional 25 basis point cuts by the end of the year, although market sentiment is pricing in a total of 75 basis points in cuts for 2024.
Conversely, the Bank of England (BoE) reduced interest rates by 25 basis points in August, lowering the rate from a 16-year high to 5%. Further cuts are anticipated in November and December, but BoE Governor Andrew Bailey has cautioned that the central bank is not in a hurry to lower rates. Currently, the Fed's interest rate is lower than the BoE's, which favors the pound against the dollar as the Fed is expected to implement more cuts than the BoE this year.
Several factors could influence the pound's performance in Q4. Inflation in the UK was recorded at 2.2% year-on-year in August, close to the BoE's target of 2%. However, core inflation rose to 3.6%, with service sector inflation exceeding expectations at 5.6%. The labor market shows signs of easing, with unemployment remaining low at 4.1% and wage growth at 5.1%, down from 6%.
The BoE anticipates that CPI will stabilize around its current level until 2025, with service sector inflation expected to decrease in the coming months. If inflation trends downward as projected, another rate cut in November appears likely. However, risks remain, particularly concerning service sector inflation and wage growth, which may remain elevated due to a shortage of skilled labor post-Brexit.
The UK economy has shown resilience, potentially benefiting from a stable political environment. The OECD forecasts a growth rate of 0.4% for the UK this year, the slowest among G7 economies, yet recent PMI data indicates continued expansion in the dominant sectors.
The Labour Party, led by Sir Keir Starmer, won the UK election in July, and the Chancellor of the Exchequer is set to present the UK budget on October 30. Starmer has warned of tough budgetary measures to address a £20 billion deficit, with potential increases in capital gains and inheritance taxes, though pledging not to raise income tax or VAT. Such tax increases could dampen production incentives, potentially hindering economic growth.
On the other side of the Atlantic, the U.S. CPI has cooled to 2.5% year-on-year as of August, with the Federal Reserve expressing confidence in a continued decline towards its 2% target. The Fed is now focusing on the labor market, which has shown signs of cooling, with 142,000 jobs added in August, slightly below expectations.
The strength of the U.S. economy remains solid, with a recorded annualized growth rate of 2.8%, surpassing forecasts. The U.S. is expected to lead G7 economies with a projected growth rate of 2.6% in 2024. The upcoming U.S. election on November 5, featuring Republican nominee Donald Trump and Democratic candidate Kamala Harris, could also impact market sentiment. A potential re-election of Trump could lead to inflationary policies, while Harris may bring stability.
Geopolitical tensions, particularly in the Middle East, could also influence the USD, as escalations may drive safe-haven flows into the dollar, potentially exerting downward pressure on GBP/USD.
Technically, GBP/USD has broken above a falling trendline from November 2007 and has surpassed the 200 SMA and 1.1350 resistance level. The bullish momentum could push GBP/USD to a new 2024 high of 1.33, with potential extensions towards 1.3750, the 2022 high. Key support is identified at 1.2850, with a break below 1.2665 signaling a lower low.
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