GBP/USD hampered by UK growth prospects

The IMF has warned that the UK economy could contract by 0.3% in 2023 and expand just 1% in 2024. The government disagrees, with Hunt saying that the UK will "beat the IMF's dismal growth forecasts."

The UK economy did grow in the final quarter of 2022, but only by 0.1%. Early indications point to another 0.1% growth in Q1.

A growing economy requires credit, but with the Bank of England continuing to raise interest rates, credit conditions are getting tougher. This makes a period of contraction this year more likely. The Bank is committed to its hawkish stance, which is necessary to bring inflation back under control. Latest figures show 10.1% in March, the seventh consecutive month of higher than ten percent inflation and far above the 2.0 target.

The war in Ukraine, rising inflation, and supply chain disruptions are all major headwinds for the UK economy. The war in Ukraine has caused energy prices to rise, which has led to higher inflation. Rising inflation has eroded household incomes, which has led to a decline in consumer spending. Supply chain disruptions have also caused prices to rise, and have also disrupted businesses, which has led to a decline in investment.

The outlook for growth remains uncertain, but it can be characterised as an optimistic deterioration. This means that a contraction is likely, but it is not expected to be as severe as previously thought.

GBP/USD forecast

The value of GBP/USD fluctuates along with sentiment towards the Fed's next actions. However, with an uncertain UK economic outlook, the cable may struggle to maintain any upward momentum.

The pair climbed from the $1.18 area to $1.25 from March to April. This can be attributed to a weaker US Dollar, which saw a period of selling in the wake of the developing banking crisis. This was considered to tip the hand of the Fed into a dovish pivot although factually is yet to be seen.

The upside moves on Gilt yields in April suggest that the fixed income market is expecting the Bank of England to stick to its hawkish policy. This, in time, will pressure sterling and the FTSE to the downside. However, if the bond sellers are incorrect and the Bank softens its policy, then yields will be seen to fall, matching the optimistic sentiment seen in the Forex and equity markets.

The GBP/USD is expected to be volatile in the near term, with dips unlikely to extend below $1.21 and rallies capped under $1.26. The UK economy is facing challenges, while the Fed is expected to raise rates. Traders will be looking towards US GDP data on April 27th and PCE on the 28th.