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Oct 16 - 06:55 PM

BNPP: Gloomy Days Ahead for the GBP; Where to Target?

By eFXdata  —  Oct 16 - 03:00 PM


BNP Paribas strikes a grim note for the British Pound, projecting a downward trajectory through the end of 2024. This bearish outlook stems from a confluence of factors, including divergent central bank policies, looming economic headwinds, and political uncertainties that cloud the nation's financial future.

Key Insights:

  1. Underperformance Highlighted: The GBP's recent plight is underscored as the second-worst performer among G10 currencies, following a notable decline in the 2-year rate differential between the UK and US. This movement underscores the hawkish persistence of the Federal Reserve, contrasted with the Bank of England's apparent halt in its tightening cycle.

  2. Persistent Downside Risks: BNP Paribas foresees a sustained bearish phase for the GBP, driven by medium-term risks. Foremost among these is the anticipation of a recession in the first half of 2024, coupled with escalating political tensions as the UK approaches its next general election. These elements pose a substantial threat, given the UK's dependence on foreign financing.

  3. Currency Predictions: The financial institution sets specific targets, envisioning EUR/GBP reaching 0.85 by the end of this year and climbing to 0.87 by Q2 2024, with a possible extension beyond this level if recessionary forces take hold. Meanwhile, GBP/USD is pegged to hit 1.26 by year's end, with a recovery to 1.32 by the close of 2024. Notably, this latter projection hinges more on USD bearishness than on GBP strength.

  4. An Economy at the Crossroads: Beyond currency metrics, the broader view for the UK is fraught with challenges. The nation's reliance on external financing makes it particularly vulnerable to shifts in risk perception, and the forecasted economic downturn would likely exacerbate this dependency.

Conclusion: BNP Paribas presents a stark vision of the years ahead for the British Pound, shaped by central bank divergences and overshadowed by recessionary and political clouds. The GBP, in this analysis, is poised to navigate a period of significant vulnerability, with potential declines driven more by its inherent weaknesses and external pressures than by its inherent economic dynamics.

BNP Paribas Research/Market Commentary


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