Pound Sterling Tipped to Remain Supported by Credit Suisse Analyst

  • GBP/EUR, GBP/USD forecast update from Credit Suisse
  • Market positioning a source of support for GBP
  • Credit Suisse upgrades UK GDP forecasts

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The British Pound is being tipped to remain relatively well supported against the Euro and Dollar over the near-term by analysts at Credit Suisse, largely in part to indications the UK economic outlook has improved which should allow another 100 basis points of Bank of England rate hikes in 2023.

But analysts at the Swiss bank say there is another, perhaps simpler, explanation to first consider when approaching the Pound; there aren't too many new sellers to be found.

"With market participants in the main GBP bears due to widely-publicised structural risks such as endless industrial strife, GBP appears to be holding its ground in part simply due to the fact that finding new sellers is not easy even with bad data," says Shahab Jalinoos, Global Head of FX Strategy at Credit Suisse.

A plurality of market participants entered 2023 expecting it to be another year characterised by Pound weakness:

Consensus of views on GBP

Above: The GBP is a consensus sell in 2023. Image courtesy of Spectra Markets.

This negative consensus towards the Pound meanwhile relies on another consensus position; that the country's economy will materially underperform:

UK faces a deeper recession

Above: "UK faces longer recession than other developed markets" - J. Safra Sarasin.

Indeed, recent data would appear to suggest these expectations are accurate.

PMI survey data covering much of January points to a slowdown and economists maintain a view the first quarter will see the UK slide into negative growth. The composite PMI fell to 47.8 from 49.0 previously, which is a 2-year low and below consensus expectations.

Elsewhere, December’s budget deficit was the highest December number since modern records began in 1993, registering at over £27BN against consensus and OBR estimates for a figure of around £17BN.

Public sector strikes continue, even after 2022 saw the most working days lost to strikes since 1992.

But the consensus is ripe for a challenge, potentially exposing those bears holding onto bets for a decline in the Pound.

UK GDP for November showed expansion and leads economists to say the economy likely avoided recession and should encourage economists at the Bank of England to raise their economic forecasts for 2022 and the year ahead at next week's interest rate and policy update.

UK GDP rose in November

The GDP figures combined with better-than-expected Christmas season trading updates from the UK's major retailers.

Credit Suisse economists recently upgraded their UK growth forecasts and now see 2023 and 2024 growth at -0.8% and +0.7% respectively, up materially from -1.3% and +0.5% previously.

They note resilience in the services sector and the benefits of a material improvement in terms of trade as global energy prices recede.

Credit Suisse holds a view that the Pound to Dollar exchange rate (GBP/USD) can reach 1.2450, based partly on the idea that the positive shifts in the economic outlook can also allow for an improvement in government finances.

Jalinoos sees improvements leading to a "virtuous cycle of improved terms of trade leading to better growth, lower energy subsidies and an improved budget outlook."

The S&P Global PMI report meanwhile pointed to improved business optimism regarding the coming year:

"Despite falling output volumes and weak demand, optimism regarding the year ahead outlook for business activity picked up in January and was the strongest since May 2022. This improvement appeared to reflect hopes of a turnaround in global economic conditions and a further slowdown in cost pressures over the course of 2023."

Credit Suisse says the UK's still-tight labour market and ongoing high wage pressures will keep the Bank of England on alert over core inflation pressures, even as the peak in energy prices allows headline inflation to fall sharply in H2 2023.

The call comes ahead of the February 02 Bank of England policy decision where markets still see a 50 basis point rate hike being delivered, taking Bank Rate to 4.0%.

But Credit Suisse economists see the Bank going further and pencil in Bank Rate to peak at 4.50% by mid-year.

They also expect the Bank to hold rates for the year, meaning a 2023 rate hike is unlikely.

Above: Money market pricing shows markets have quite recently started to price a steeper pace of Bank Rate cuts of late (blue line).

Pound Sterling Live wrote recently that money markets now show investors have raised expectations for Bank Rate to be cut later in the year, a development that is consistent with underperformance by the British Pound.

Regarding the Pound's outlook, Credit Suisse expects steady trade ahead against the Euro that should confine EUR/GBP to between 0.8700 and 0.8900.

This gives a Pound to Euro exchange rate range of 1.1236 and 1.15.

"With both the euro area and the UK being impacted by similar terms-of-trade and core inflation pressures, the likelihood of a sharp break out of the rough range that has held this year is low," says Jalinoos.

Credit Suisse meanwhile maintains a view that GBP/USD can reach 1.2450.