GBP/USD H2 2024 forecast

GBP/USD outlook rate cut expectations

At the time of writing, the Federal Reserve has started its rate-cutting cycle with a bumper 50 basis point rate cut in the September meeting, marking the first rate cut in four years. This cut took the rate to 54.75% -5%. The Fed’s dot plot pointed to two more 25 basis point rate cuts this year. However, the market is pricing in 75 basis points worth of cuts from the Fed this year.

This is in contrast to the Bank of England, which cut interest rates by 25 basis points in August, bringing the rate down from a 16-year high to 5%. The central bank is expected to cut rates again in November and potentially in December. However, BoE Governor Andrew Bailey warned that the central bank was in no rush to cut rates.

Currently, the Federal Reserve has a lower interest rate than the BoE, and the Fed is expected to cut rates more than the BoE this year, which is favouring the pound over the USD.

What factors could influence the pound in Q4?

GBP/USD outlook: UK economic factors

Inflation in the UK was 2.2% YoY in August, close to the BoE's 2% target. However, core inflation rose to 3.6%, and service sector inflation was higher than expected at 5.6%, up from 5.2%.

The labour market shows some signs of easing, but unemployment remains low by historical standards at 4.1%, and wage growth has eased from 6% but remains high at 5.1%.

The BoE expects CPI to hover around its current level heading towards 2025 and service sector inflation to ease over the coming months. Should inflation trend lower along the forecast trajectory, then another rate cut in November looks likely.

Source: BoE May Monetary Policy Report

Service sector inflation and wage growth remain risks to this projection. There are concerns that the UK labour market has changed fundamentally since Brexit due to a shortage of skilled staff, which could keep wage growth strong even as unemployment picks up. Given that wage growth is intrinsically tied to service sector inflation, this could keep service sector inflation sticky and delay rate cuts for the pound.

Meanwhile, the UK economy is also proving to be more resilient than expected, possibly benefiting from a more stable political backdrop. Wealthy OECD points to 0.4% growth this year, marking the slowest growth rate for all G7 economies. Recent PMI data has shown that the dominant sector continues to experience expansion.

GBP/USD outlook: UK political factors

Sir Kier Starmer and the Labour Party won the UK election in July. The Chancellor of the Exchequer is due to unveil the UK budget on October 30. In a speech on August 27, Starmer warned that the budget would be tough, speaking extensively about the need to plug a £20 billion black hole in the UK's finances. While the government has pledged not to increase income tax or VAT, capital gains and inheritance tax will likely be hiked.

A substantial tax increase can reduce the incentive to produce, leading to a reduction in the supply of goods and services and slower growth. Given that his economic pledges are based on boosting UK growth, Starmer will be keen to avoid slowing growth too much.

What factors could influence the USD in Q4?

GBP/US outlook- US economic factors

At the time of writing, US CPI has cooled to 2.5% YoY in August, and the Federal Reserve has indicated that it's confident that inflation will continue cooling towards the 2% target.

As a result, the Federal Reserve’s attention is shifting towards the other component of its dual mandate: the labour market, which has shown some signs of cooling but not collapsing.

The jobs market is easing, with 142,000 jobs added in August, slightly weaker than expected. This follows a July jobs report that was significantly weaker, at 89k.

The question is, will the slowdown in the jobs market stop here, or will we see that demand for workers, as reflected by the drop in openings, be soon reflected in job losses? Job openings are back where they were in 2019. Signs of a weakening jobs market could fuel Fed rate cut expectations.

Meanwhile, economic growth in the US is still solid. The US recorded 2.8% annualised growth, up from 1.6% in Q1 and ahead of forecasts. According to the OECD, the US is expected to see the strongest growth among the G7 economies, with 2.6% expected in 2024.

GBP/USD outlook – US political factors

The US election will take place on November 5th between Republican nominee Donald Trump and Democratic candidate Kamala Harris. The polls are tight. The market will likely welcome the continuity and stability that Kamala Harris could bring. This would leave the focus on the Fed and the timing of a potential rate cut.

However, should Trump be re-elected and push forward with plans for trade tariffs and business tax cuts, these policies could be inflationary, which may boost the US dollar.

GBP/USD Outlook – technical analysis

Tensions in the Middle East are ramping up at the time of writing, reminding us that geopolitical tensions in parts of the globe remain elevated. A further escalation of tensions in the Middle East and a broadening of the conflict between Hamas and Israel could drive safe-haven flows into the US dollar, pulling GBP/USD lower.

GBP/USD Outlook – technical analysis

GBP/USD Monthly chart

GBP/USD is seen breaking out above a falling trendline dating back to November 2007.

GBP/USD Weekly chart

Looking at the weekly chart, GBP/USD has broken out of the symmetrical triangle pattern, rising above the 200 SMA and 1.1350 resistance. The pair also trades above a rising trendline dating back to the September 2022 low.

The bullish breakout sees GBP/USD rise to a fresh 2024 high at 1.33. Bulls could extend the run towards 1.3750, the 2022 high.

On the downside, 1.2850 is a key support as the confluence of the 200 SMA and the rising trendline support. A break below 1.2665, the September low, and 50 SMA is required to create a lower low.

-- Written by Fiona Cincotta, Market Analyst

Follow Fiona on X: @FionaCityIndex