Pound Sterling 2024 Outlook: Losses Seen Against Euro & Dollar As Bank of England Leads On Rate Cuts Says TD Securities

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The Bank of England will cut interest rates before the U.S. Federal Reserve and the European Central Bank, leading to a soft trajectory for the British Pound in 2024.

This is according to TD Securities - the international investment and capital markets bank - whose analysts have laid out their predictions for 2024.

"2024 is very much about the duration and severity of growth downturns, and the resultant easing we expect from central banks," says James Rossiter, Head of Global Macro Strategy at TD Securities in London.

Economists at the bank reckon economic growth in 2024 will likely be well below 1.0% for the U.S., Eurozone and UK, ensuring inflation returns steadily toward target.

"The pace of central bank rate cuts throughout the year is likely to be much faster than markets currently expect," says Rossiter.

The UK economy is forecast to grow 0.3%, as is that of the Eurozone; both are seen growing at 1.1% in 2025.

"The past rise in interest rates has already started to bite on corporate and household spending, and we expect both economies to see essentially no growth through from mid-2023 to mid-2024, with mild recessions in each," says Rossiter.

In the UK, consumer demand is expected to come under pressure as the labour market continues to soften and past rate hikes weigh further on households.

"As such, growth will likely be tepid at best in 2024, which in turn should help spur a more certain decline in underlying inflation," says Rossiter.

TD Securities expects the first cut from the Bank of England in May, the Federal Reserve and European Central Bank are meanwhile forecast to cut in June.

Above: The Bank of England will cut more than the ECB in 2024 says TD Securities.

Pound Sterling would likely come under pressure should the Bank of England lead the rate cutting cycle as this implies UK bond yields will fall faster relative to those of the Eurozone and U.S.

"Growth expectations for the UK are starting to correct lower and a lot of the good news that had been priced into GBP has started to recede," says TD Securities.

As such, analysts forecast the Pound to Dollar exchange rate to trade at 1.22 by the end of the first quarter of 2021, down from the 1.26 level seen at the time of publication. 1.24 is forecast by the end of the second quarter, 1.26 by the end of the third quarter and 1.28 by the end of 2024.

For the Euro to Pound exchange rate, a target of 0.89 is pencilled in for the end of Q1 through to the end of Q2, and 0.88 is forecasted for the end of Q3 and Q4.

This gives a Pound to Euro exchange rate forecast profile of 1.12 and 1.14, both below the current levels in spot at 1.1760.

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Money market pricing shows investors are now positioned for the ECB to cut rates as soon as April, with the Bank of England now only priced for an August rate cut.

The journey to this outcome has underscored the rise in the Pound-Euro exchange rate through late November and into early December.

Meanwhile, the Fed is seen delivering a first cut by June at the latest.

This all suggests the market's timings are at odds with those expected by TD Securities and the Pound's recent rise against both the Euro and Dollar.

A reversal in fortunes for Pound Sterling is thus possible if the market begins to align with the views of the investment bank.