GBP/USD forecast: What lies ahead for the pair?

By Capital.com Research Team15:49 (UTC), 2 November 2022 Updated

US dollar bills with British £1 coins and notes — What lies ahead for the GBP/USD currency pair, in the face of a looming UK recession? – Photo: Matt Cardy / Getty Images

Following a downtrend that lasted several months, the British pound (GBP) has risen 11% against the US dollar (USD) since hitting a record low of $1.0327 in September, although it remains down close to 15% since the start of the year.

With UK inflation elevated and still rising, the cost-of-living crisis taking hold, growth slowing, and debt markets in disarray following the latest budget, the outlook for the pound continues to deteriorate. Meanwhile, the USD is supported by safe-haven flows and hawkish US Federal Reserve (Fed) bets.

Live GBP/USD Exchange Rate Chart

In this article, we look at what has been driving the pair, and examine analysts’ GBP/USD predictions for 2022 and beyond.

How has GBP been performing in 2022?

After rising to a five-year high of $1.4245 in May 2021, GBP/USD has been steadily falling. The British pound to US dollar exchange rate started 2022 at $1.3470 before rising to $1.3750 in January.

The pair has declined since then, and traded at a record low as $1.0539 – a record low – on 28 September 2022, before recovering to $1.08 the next day, on rumours that the Bank of England might step in to prop up the currency following its rapid drop.

In a piece for the Financial Times, former fund manager and Resolution Foundation associate Toby Nangle commented:

“Nothing in gilt markets in the past 35 years – not the UK’s ejection from the Exchange Rate Mechanism, 9/11, the financial crisis, Brexit, Covid or any Bank of England move – compares with the price moves in reaction to the chancellor’s mini-budget. The brutal sell-off in UK government debt may have come in the context of rising yields across the globe, but it largely reflected financial markets getting increasingly concerned about the direction of UK macroeconomic policy.”

Sterling fell as the outlook for the UK economy deteriorates amid rising inflation fuelled by sanctions on Russia, which have pushed up energy prices, and the aftermath of Covid-era quantitative easing. Former Chancellor of the Exchequer Kwasi Kwarteng had vowed to stick with his tax-cutting drive, prompting warnings that the UK was entering a currency crisis.

However, following his resignation on 14 October 2022 he was replaced by Jeremy Hunt, who scrapped proposed tax cuts and reinstated a planned rise in corporation tax from 19% to 25% for companies earning more than £50,000 in profits.

GBP/USD Exchange Rate (2012-2022)

According to the latest figures from the Office of National Statistics (ONS), the UK economy is estimated to have shrunk by 0.3% in August 2022, following modest growth of 0.2% in July.

“There has been a continued slowing in the underlying three-month on three-month growth, where GDP also fell by 0.3% in the three months to August compared with the three months to May 2022,” the ONS said.

Data from the flash October Purchasing Managers’ Index (PMI) confirmed that the UK economy has lost its momentum. The reading came in at 46.2 for October, down from 48.4 in September – the lowest point in 29 months. The index has come in below 50 – the mark separating contraction and expansion – for the third straight month.

Speaking to the Financial Times on 6 September, Chris Williamson, chief business economist at S&P Global Market Intelligence, said the figures showed that then new UK prime minister Liz Truss would be “dealing with an economy that is facing a heightened risk of recession, a deteriorating labour market and persistent elevated price pressures linked to the soaring cost of energy”.

Inflation, as measured by the Consumer Price Index (CPI), was up to to 10.1% year over year (YoY) in September, according to the UK’s Office of National Statistics (ONS), from 9.9% in August.

Producer Price Inflation (PPI), which measures inflation at the factory gate level, came in at 20% in the year to September 2022 – down from 20.9% in August and a record high of 24.1% in June. PPI is often considered a lead indicator for consumer prices, suggesting a higher CPI going forwards. The Bank of England has stated that UK inflation could peak at more than 13% this year.

Rising inflation increases pressure on the BoE to hike interest rates. In its September meeting, the central bank raised interest rates by 25 basis points (bps). This was the sixth consecutive meeting that saw rates raised.

However, with growth stalling, it is looking increasingly likely that if the BoE keeps raising interest rates, the UK could fall into recession. This means the bank could be limited as to how far it can raise rates.

What’s been moving the USD?

The USD has been rising across the board on a combination of hawkish Fed bets and safe-haven flows.

Inflation in the US is still rising, with economists polled by Reuters forecasting that the US CPI rose 0.4% in September. This followed a 0.1% rise in August, after remaining flat in July. The year-on-year reading was 8.2% for September, up from 8.1% in August.

The Fed raised interest rates in September by 75bps, the same amount as in June and July, in a move widely expected by markets.

Analysts at Dutch bank ING Group have forecast that the Fed has two more hikes in store:

“Given the Fed’s aggressive stance and the likelihood that inflation moves little over the next month while job creation remains firm, we expect the Fed to hike 75bp for a fourth consecutive time at the November 2nd FOMC meeting. Come the December FOMC meeting we are more hopeful that we will see clearer signs of moderating price pressure on the lead indicators, but we are also fearing weaker activity data that may be enough to convince the Fed to move more cautiously. 50bp is our call, which would leave the target range at 4.25%-4.5%, but we certainly can’t dismiss the possibility of a fifth 75bp hike.”

The predicted hike marked the third consecutive increase of such magnitude. Given the strength of the labour market and a more robust US economy, with less exposure to the direct impact of the Russia-Ukraine war, the Fed has a little more wiggle room to front-load rate hikes.

While a recession in the UK is looking a distinct possibility, the chances of a recession in the US seem less likely. The central bank still appears confident that the economy can handle rate hikes, with Fed chair Jerome Powell saying before Congress on 22 June:

“We are highly attentive to inflation risks and determined to take the measures necessary to restore price stability. The American economy is very strong and well-positioned to handle tighter monetary policy.”

GBP/USD forecasts

With the differences between the two economies becoming clearer, and with the UK’s recent changes in fiscal policy, let’s look at analysts’ pound-to-dollar forecasts.

In a recent G10 FX Daily Update on 28 October, Scotiabank analyst Shaun Osborne said:

“The FT reported late yesterday that PM Sunak and Chancellor Hunt are considering tax hikes and spending cuts worth GBP50bn to plug the fiscal gap of around GBP35bn. The larger scope of the plan (savings and revenue increases will more than cover the fiscal hole) reflects the Chancellor’s hopes to re-establish fiscal credibility, officials are indicating.

“We still rather think the GBP has seen the worst of the recent turmoil, and restoring credibility to government finances could help the pound regain the $1.20 zone after its recovery through the $1.14 area. But the delayed fiscal update is still a long way off, leaving the GBP subject to swings in the broader USD tone in the meantime.”

Technically, Osborne was neutral/bearish on the GBP/USD rate, saying: “The GBP is consolidating gains from earlier in the week but the late week stall in the mid 1.16 zone may develop into more persistent resistance unless GBP gains resume in short order. We are bullish on the broader outlook for the GBP above the 1.14 level and expect firm support on dips to the low/mid 1.14 area from here. Intraday gains through 1.1610 should cue renewed GBP gains.”

ING analyst Chris Turner was also relatively neutral in his most recent pound to US dollar forecast, issued on 24 October 2022:

“After the failed experiment with Trussonomics, the challenge facing the new team will be harder than the one that existed earlier this summer and probably a reason why international investors will not want to chase GBP/USD above the 1.15 level. FX volatility does remain exceptionally elevated, however, and large swings cannot be ruled out.”

Turner’s ING colleague Francesco Pesole was mildly bearish on the pound in a recent FX piece, saying:

“We continue to highlight the risk of a dovish surprise (50bp hike) by the Bank of England tomorrow: More details in our scenario analysis. The combination of a USD-positive FOMC and a GBP-negative Bank of England means cable could test 1.1300 by the of the week. EUR/GBP may climb back into the 0.8650-0.8700 area in the coming days.’

In their latest FX Snapshot on 31 October, analysts at Citibank’s Hong Kong office wrote about their outlook for GBP/USD:

“The team has recently turned tactically neutral on GBP as PM Truss is replaced with a more market friendly leader. However, GBP/USD is likely to top out at around 1.15. Long-term issues also remain – UK business investment remains structurally weak. With increasing pressure on fiscal prudence, this is unlikely to reverse any time soon.

“As a result, GBP is likely to underperform pretty much across the board (especially vs Commodity Bloc, CHF and SGD) while likely locked in a 1.05 – 1.15 trading range vs USD for much of this year.”

In her latest video on the currency pair, Capital.com analyst Daniela Hathorn outlined the following support and resistance levels to watch in upcoming weeks:

Resistance

1.1540 (Confluence from the beginning of September)
1.15 (5 October high)
1.1380 (13 October high)

Support

1.1055 (13 October low)
1.0765 (12 October low)
1.0514 (28 September low)

In its GBP/USD forecast for 2022 as of 2 November, algorithm-based forecaster WalletInvestor predicted the pair could fall in the near term. The service estimated the pair could end the year at $1.148. Its GBP/USD forecast for 2025 was for the rate to maintain at $1.13 by the end of the year.

AI Pickup’s GBP/USD forecast for 2022 saw the pound trading at a slightly higher average of $1.16 by the end of this year, before strengthening to an average of $1.33 in 2025. The site’s GBP/USD forecast for 2030 suggested an average of $1.38.

When looking at any GBP/USD forecasts, remember that analysts can and do get their predictions wrong. We recommend you always do your own research and consider the latest market trends and news, technical and fundamental analysis, and expert opinion before making any investment decisions.

Remember that currency pairs are highly volatile, and never invest money you cannot afford to lose.

FAQ

Why is GBP/USD rising?

The value of the British pound against the US dollar depends on the performance of the UK economy in comparison to the US economy.

Central bank and government policies on inflation, interest rates and public spending, such as on stimulus packages, are an important influence on the currency pair’s value.

Since hitting a record low in September, GBP has risen over 11% while USD has softened on expectations the Fed may slow its pace of policy tightening, and as turbulence in British politics died down with the formation of a new Conservative government.

Will GBP/USD go up or down?

Whether GBP/USD goes up or down depends on the economic outlook of each economy, the rate of inflation, and the central bank’s ability to adjust monetary policy.

Broadly speaking, as of 2 November 2022, analysts’ pound-to-dollar forecasts were mostly neutral, though it’s important to keep in mind that their projections could be wrong. Always do your own research.

When is the best time to trade GBP/USD?

The best time of day to trade the GBP/USD pair is when both the UK and US financial markets are open, and the currency markets can react to the release of economic data in real time. Weekends and public holidays can result in delayed market reactions.

Is GBP/USD a buy or sell?

As of 2 November 2022, analysts were mostly neutral in their GBP/USD forecasts. However, it is important to realise that analysts can and do get their estimates and projections wrong.

You should always carry out your own research, and remember never to invest more money than you can afford to lose.