Politics Could Finally Give Pound Sterling a Boost Against Euro and Dollar: Argentex

• GBP/USD bull scenario sees 1.37
• GBP/EUR bull scenario sees 1.19
• But both pairs also have a bear scenario

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Global payments firm Argentex says 2024 will be characterised by further Pound Sterling resilience, with a potential boost coming from elections due in the second half of the year.

In a research note setting out forecasts and scenario analysis, Joe Tuckey, Head of FX Analysis at Argentex, says UK and US elections loom large for FX markets in 2024.

"In the UK, Labour's assertion that they would integrate closer to Europe is seen as a potential sterling positive," he says.

"As the general election, likely to be in Autumn, approaches, certain sterling positive themes may emerge and be priced in driven by manifesto pledges," he adds.

In the US, the return of Trump would likely reignite volatility after the relative calm of Joe Biden’s tenure, according to the analyst.

"Markets may become particularly concerned if the Trump regime exits NATO and withdraws support for foreign wars, thus asserting more pressure on other economies to pick up the financial slack," he explains.

Argentex's base scenario for the Pound to Dollar exchange rate in 2024 suggests Sterling will manage to continue its recent resilience, incrementally edging higher as the dollar weakens.

The Bank of England will retain a less dovish stance than the Fed, whilst economic data is likely to remain "unspectacular" but in line with moderate growth expectations of +0.5% to 1% growth in 2024.

"The UK will once again manage to sidestep the annual doom-monger narratives, as rate cuts, falling inflation and low unemployment fuel a continuation of the drawn-out post-Brexit recovery in the UK," says Tuckey.

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Argentex's base-case scenario forecasts Pound-Dollar at 1.30-1.33.

But, a bullish scenario of 1.35-1.37 emerges if residually higher inflation in the UK may mean the BoE cuts later and by less than some other G10 central banks.

A bearish scenario would see 1.18-1.20. Such a scenario could involve a major economic slowdown and a Liz Truss-era bond sell-off as markets question fiscal giveaways associated with the election.

Image courtesy of Argentex.

Regarding the Pound to Euro exchange rate outlook, Argentex believes broad-based fundamental drivers for both currencies are likely to remain similar, with growth expectations of between +0.5% and 1%.

Central banks are primed to make interest rate cuts through 2024, as disinflation steadily creeps toward 2%. Inbound data will likely be a mixed bag, depending on employment, energy prices, consumer behaviour and global demand themes.

"However, the tendency for the Bank of England to be less dovish than the ECB may remain, as well as the potential for a post-General Election bounce later in the year," says Tuckey.

Argentex's base case anticipates a 1.15-1.17 range for Pound-Euro, but a bullish 1.18-1.19 emerges if the aforementioned 'sticky' inflation setup emerges.

Another bullish scenario would see a new Labour Government drive Sterling upside "on a combination of 'out with the old, in with the new' excitement, and the pricing in of 'market friendly'," says Tuckey.

A bearish scenario would see 1.12-1.14 as the ECB are unable to follow through with as many cuts as the market expects,

"The euro strengthens as poor performing economies such as Germany, begin to outperform lowly expectations, in part aided by global demand for eurozone exports," says Tuckey.