GBP outperformance tipped to endBut limited risk of notable downside seenBarclays refrains from major USD upgradeEURUSD seen constrained in lower range

Image © Adobe Stock

Barclays says in a new forecast revision it turns "less hopeful" on the British Pound's prospects, particularly against the Euro, Dollar and Swiss Franc.

The call from the UK high-street lender and investment bank comes at the end of the northern hemisphere's August holiday season and, if correct, suggests the UK currency's strong run of 2023 is about to fade.

"We turn less hopeful on the GBP," says Themistoklis Fiotakis, an analyst at Barclays who says consumer demand appears to be fading and the labour market might finally be cooling.

"While sticky wage growth and inflation imply considerable carry support for longer, there is now less scope for further outperformance, vs. either the EUR or the USD," he adds.

At the start of September, the British Pound remains one of the best-performing major currencies in the G10 FX space, vying closely with the Swiss Franc for outperformance stakes.

This has been the case for the rump of 2023 and has vindicated the bullish stance held by Barclays' strategists over recent months.

Barclays' analysts have been constructive on Sterling and captured the currency's outperformance in their strategy guidance to clients, giving the bank's analysts more credence when suggesting the tide might be turning on Pound Sterling outperformance.

Above: The Pound is still on top. The image shows GBP performance against G10 peers for 2023.

Barclays forecasts nevertheless reveal there is unlikely to be a major collapse in the Pound's values. They have the Euro to Pound Sterling exchange rate at 0.86 by the end of 2023, 0.87 by the end of the first quarter of 2024, from where it is expected to hold through to the end of the third quarter of 2024.

This translates into a steady Pound to Euro exchange rate profile of 1.1630 and 1.15.

For the Pound to Dollar exchange rate, the forecast profile is 1.26, 1.24, 1.25 and 1.26 for the end of 2023, end-Q1, end-Q2 and end-Q3 2024, respectively.

Looking at other forecast adjustments made by Barclays, analysts are seen lowering expectations for the Euro-Dollar exchange rate and now look for a fairly range-bound 1.08-1.10 profile.

Anything beyond this range is seen as unsustainable in the absence of any major surprises.

"It is very tempting to revise our dollar views meaningfully stronger... But we refrain from doing so here," says Fiotakis.

Reasons to temper enthusiasm for the U.S. Dollar include a meaningful tightening in U.S. financial conditions led by higher real rates, which should weigh on economic activity.

It is also noted positioning stands as a headwind as long USD positions have likely been rebuilt at the recent highs. "The recent dollar rally triggered a sizeable correction in favour of the dollar, which suggests that part of the recent strength might have had some technical aspects to it," says Fiotakis.

Elsewhere, and despite significant challenges, analysts still see a path of JPY strength (albeit more backloaded, as it faces near-term headwinds from yen carry trades), mainly to reflect the risks around the global disinflation process, eventual BoJ rate hikes next year, and the ongoing current account improvement.

"A market regime whereby disinflation leads to carry demand and hurts our view is plausible. In this case, investors would need to view the JPY as a combination/barbell/hedge to our FX carry views," says Fiotakis.