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The British Pound will lose value to the Euro and Dollar over the duration of 2023 says J. Safra Sarasin, a private Swiss bank, in a year-ahead research briefing.

"The British pound has shown a remarkable recovery ever since the UK government turned away from its 'mini budget' plans. Yet we would not chase the rebound," says Dr. Claudio Wewel, FX Strategist at J. Safra Sarasin.

The call comes following a relatively robust final quarter to 2023 that saw the UK currency recover from multi-year lows against the Euro and U.S. Dollar and a host of other major world currencies.

The rally comes off the September lows that were triggered by a bond market meltdown that followed the mini-budget of former Prime Minister Liz Truss in which she attempted to push through a series of massive unfunded tax cuts.

Although markets have stabilised under the new Prime Minister Rishi Sunak, the UK's growth outlook remains challenging and economists say this could present a significant headwind to the Pound.

"We remain cautious on the pound, despite the easing of the confidence crisis induced by the Truss-led government," says Wewel.

"The UK growth outlook remains bleak for several reasons. On the back of high energy prices and Brexit-induced supply bottlenecks, the UK currently experiences the steepest rise in consumer prices within the group of G10 economies," he adds.

The Bank of England forecasts a recession to take hold of the UK economy in the final quarter and to last until 2024 owing to elevated inflation, rising interest rates and subdued consumer confidence.

"The cost-of-living crisis constitutes an enormous strain on UK households, which should weigh on consumer spending and depress growth in the coming quarters," says Wewel.

Although Sunak has restored credibility in the UK's debt dynamics, the UK's tax burden is at post-war highs as state spending continues to spiral.

The strain on businesses and consumers directly resulting from government policy decisions will therefore act as a drag on the Pound, according to J. Safra Sarasin research.

"A new austerity drive of Prime Minister Sunak's government should add to this," says Wewel.

Bank J. Safra Sarasin forecasts the Pound to Dollar exchange rate to trade at 1.15 by the end of the first quarter of 2023, 1.16 by the end of the second quarter, 1.18 by the end of the third quarter and 1.19 by the end of the year.

The pair is currently quoted at 1.20.

The bank's forecast profile for the Pound against the Euro is remarkably flat, however, given the Eurozone is also expected to face significant challenges.

The Euro to Pound exchange rate is forecast at 0.88 for the aforementioned points in time, yielding a Pound to Euro exchange rate forecast profile of 1.1360 for 2023.

The pair is currently quoted at 1.1348.

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