GBP to EUR exchange rate to remain stableGBP to USD to fall through 2024EUR to USD faces months of weakness

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The British Pound and Euro have reached the "end of the road" according to a new analysis from HSBC as analysts hail the return of the "king dollar".

HSBC is the second major British bank to have recently signalled a turning point has been reached for the Pound with Barclays saying last week it was now "less hopeful" on the Pound.

Both have been bullish on the UK currency in the first half of this year but the tide is turning according to Paul Mackel, Global Head of FX Research at HSBC, "King dollar has already been making a comeback but its reign can last longer," he says.

HSBC was amongst the first of the major institutions to turn constructive on the British Pound's prospects back in late 2022, a call that came in the wake of the market disruptions sparked by the short-lived premiership of Liz Truss.

Pound Sterling duly rose against both the Euro and Dollar over the subsequent months with outperformance lasting into early August 2023.

"We have been upbeat on EUR and GBP since November 2022 but think the rally in each currency has played out and look for a reversion lower in the months ahead," says Mackel in a research note issued in early September.

HSBC notes consumer confidence has taken a turn in the UK and Eurozone and this tends to precede macroeconomic underperformance, "it is hard to see much cyclical upside for these currencies," says Mackel.

Analysts at the lender also note business sentiment has deteriorated more markedly in the Eurozone and UK with the once resilient service sector now faltering; "and there is little reason to be that optimistic of an imminent rebound."

With regards to the UK, Mackel notes housing activity is stalling, with new mortgage approvals stagnating around post-financial crisis levels and house prices falling at their fastest pace since then too.

Above: "Consumer sentiment rebound has stalled in both economies" - HSBC.

The Dollar is meanwhile expected to outperform thanks to resilient U.S. data that has rebooted the 'U.S. exceptionalism' trade.

But, "even a waning of the 'U.S. exceptionalism' narrative may not be necessarily adverse for the greenback when we consider the broader implications on the global growth outlook. Meanwhile, although U.S. yields are likely to fall, further rate cuts could be discounted more elsewhere," says Mackel.

The stars are therefore aligned for a multi-month period of U.S. Dollar strength according to HSBC.

"Business surveys have turned markedly lower in recent months" - HSBC.

HSBC forecasts the Euro to Dollar exchange rate will slide to 1.02 by the middle of 2024 and the Pound to Dollar exchange rate will fall to 1.18 over the same period.

"This profile suggests EUR-GBP will remain fairly range-bound as both economies face similar weakening domestic stories which do not justify a breakout from levels seen over the last year," says Mackel.

HSBC's house forecast for the Pound to Euro exchange rate is 1.16 by mid-2024, suggesting it can stay in touch with current levels over the coming months.

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

"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.

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.