NatWest bank forecasts show pound sterling better supported against Euro and Dollar in 2023. Though its near multi-decade lows and the risk of a major decline is limited, says NatWest Markets as it assesses the currency's prospects for 2023.
The UK bank says it expects to see the Pound appreciate against the Dollar and remain relatively stable against the Euro, although the risks are titled to the upside against its European counterpart. "Downside risks for Sterling are exaggerated and all-time lows seen this year are unlikely to be revisited," says Paul Robson, Head of G10 FX Strategy, EMEA, at NatWest Markets.
The Pound to Dollar exchange rate plumbed its lowest point on record at 1.0354 on September 28, the declines came amidst the financial market tremors ignited by previous Prime Minister Liz Truss' ill-fated mini-budget. Truss caused alarm amongst international investors as her government announced aggressive tax cuts, all of which would be funded by additional borrowing.
This led markets to ponder on the sustainability of UK debt and policy over the coming months and years. The Pound to Euro exchange rate meanwhile fell to a low of 1.0774 at the time, its lowest since March 2020.
"Political risks have been reduced significantly," says Robson. "A return to fiscal orthodoxy, reduced political risk premium... also play positive for the currency."
But according to NatWest Markets, holding the keys to the Pound's performance over 2023 will be energy prices and their associated impact on the country's current account. "The main risk is that energy prices surge once again and gains persist through 2023, something that would see weaker growth, higher government borrowing and a wider current account deficit," says Robson.
The UK typically runs a current account deficit courtesy of the country importing more than it exports. This imbalance would typically create an outflow of currency and put downward pressure on the Pound.
The budget ballooned in 2022 as the cost of importing fuels surged in the wake of Russia's invasion of Ukraine.
Defending the Pound against the impact of the UK's penchant for imports is the inflow of foreign capital from international investors. The Pound therefore finds itself weaker when the import bill balloons or foreign investors are no longer willing to fund the deficit by increasing inbound investments.
"Sterling has tracked the evolving consensus forecasts for the UK current account deficit. But there are good reasons to believe the deficit will be smaller than the consensus expects in 2023," says Robson.
Prof. Carl Boniface
Titled (adj) = upright, highborn, blue-blooded, posh, aristocratic, upper class, (ant) = petty
Plumbed (v) = comprehended, understood, fathomed, grasped, knew, known, followed
ill-fated (adj) = doomed, ill-starred, unlucky, unfortunate, disastrous, (ant) lucky
Orthodoxy (n) = convention, belief, prevailing view, canon, tenet, custom, accepted view/belief
Penchant (n) = liking, fondness, desire, weakness, taste, inclination, (ant) antipathy