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Pound Dollar Exchange Rate Forecasts 2014: GBP/USD Predicted to Decline This Year

Updated: The GBP exchange rate complex has come under pressure once pound sterling at start of Aprilmore at the start of April with the entire Markit PMI series missing the mark. However, many analysts continue to consider the latest price action as being representative of consolidative price action.

April will be pivotal for the UK unit - can the uptrend reassert itself or will we continue to see more of the same?

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By Gary Howes Median forecasts suggest that sterling will weaken against the US dollar to 1.59 by the end of the year.

The following analysis comes courtesy of Smart Currency Business and is correct as of January 2014. Click here to enlarge the table.

Note also that all FX quotes are taken at spot. Your retail rate will be subject to the spreads levied by your bank. However, an independent FX provider will guarantee to undercut your bank's spread, thus delivering up to 5% more currency. Find out more here.

Forecast for the pound dollar exchange rate in 2014

The outlook for sterling - positives and negatives

The outlook for the UK and sterling is optimistic, due to a string of positive data which strengthened sterling towards the end of 2013.

The UK’s labour market is expected to improve throughout 2014, with the overall rate of unemployment nearing the BoE’s 7% target, leading the central bank to contemplate raising interest rates.

Should this occur, some analysts are suggesting that the BoE may revise the unemployment threshold to 6.5% in order to reduce the possibility of a rate hike in 2014. Individuals and companies in debt could also face significant difficulties due to a rise in interest rates.

A strong pound in the first quarter of 2014 would hurt the UK’s export market and could lead to subdued growth, which in turn could weaken the pound later in the year.

Is the pound dollar exchange rate at overbought levels?

Sterling’s strong performance towards the end of 2013 has led to speculation that the currency has been ‘overbought’, rendering it susceptible to a sharp depreciation or ‘market correction’

Analysts also fear that cheap credit and the UK government’s ‘Help to Buy’ scheme could cause a property bubble which, upon bursting, could plunge the UK back into recession.

US tapering begins

When the Federal Reserve finally tapered in December, it was under more promising economic conditions. US unemployment fell significantly from 7.3% in October 2013 to 7% in November 2013, nearing the Federal Reserve forward policy guidance target rate of 6.5%. This allowed the Federal Reserve to cut its monthly bond purchases from US$85 billion to US$75 billion a month, decreasing its monthly injection into the economy by US$10 billion.

The taper was modest, and rightly so. Like the rest of the western world, the US still faces major problems.

These include concerns over low inflations levels, the government raising more in taxes than it spends, and the existence of a balance of payments deficit. Until these begin to reach some sort of equilibrium, there are going to be continued strains on the US dollar.

US dollar forecasted to claw back strength

The United States has shown resilient growth through 2013. Optimism for growth in 2014 remains high, with forecasts recently upgraded, in part due to a reduction in fiscal drag; an improving real estate market and an increase in consumption.

The US dollar is expected to claw back a lot of the strength it lost through the latter part of 2013 due to improving growth prospects and central bank policy.

Further tapering to support US dollar exchange rate complex

Some economists are projecting that the Federal Reserve will continue to taper QE by US$10 billion at each upcoming meeting, until the October meeting. At this point, the focus is expected to shift to when the central bank can potentially hike interest rates. This should lead to a stronger US dollar.

Risks for the US dollar

One of the most pressing concerns for the US economy and the global economy as a whole is the necessity for the Republicans and Democrats to come to an agreement to raise its debt ceiling as the deal agreed in November only raised the debt ceiling until 7 February 2014.

If the debt ceiling is not raised, the US would in theory default on its debt. Should the deadline not be met, it is expected that the Treasury would employ measures to extend it futher; however, the longer this drags on without a resolution, the more nervous the markets will become.

Economists are forecasting a strengthening US dollar; this could damage US export competitiveness and, in turn, US growth.

Inflation is expected to remain low throughout 2014, meaning that there is little pressure on the Federal Reserve to raise interest rates in the short term. This would limit the US dollar’s potential strength.

The dangers of foreign exchange forecasting

Forecasting currency movements is not for the faint hearted. In 2013, we saw a range of over 11% between the highest and lowest US$/£ exchange rates. This movement occurred both ways, so we effectively saw a “total” movement of nearly 20%.

Forecasts from major financial institutions for the GBP/USD rate in 2014 vary dramatically, with a predicted median of 1.5900 at the end of 2014.

When you look at this year’s forecasts, the range is quite staggering; the minimum forecast rate is US$1.3400/£1 in twelve months’ time and the maximum is US$1.7500/£1. The range from the banks we have listed is a maximum rate of US$1.6500/£1 and a minimum rate of US$1.5000/£1, which would mean that for each US$1 million changed from or to sterling, you could be nearly US$90,000 better or worse off.