The short answer is possibly yes. According to investment bank Morgan Stanley the British pound could be one of 2023’s best-performing financial assets. However, 2022 was a bad year and 2023 is forecast to be as bleak, but positive developments and surprises could provide a healthy boost to Sterling.
The pound had one of its worst years
2022 was not a great year for the pound and many believe the new year will be similar. The pound dropped against the US dollar, the euro, commodity currencies and the Swiss franc.
With three prime ministers, four finance ministers and the chaos of the mini-budget, the pound tanked and was within an inch of parity against the US dollar in 2022.
The pound fell due to the political chaos throughout 2022. However, it was in September, when all turmoil unfolded after the government’s huge tax giveaway flopped and investors abandoned the pound and UK bonds, while the Bank of England intervened to prevent a gilt market crash.
Sterling was compared to an emerging-market currency and the UK’s credibility on international markets was damaged.
New year’s surprises
Well, Morgan Stanley paints a pessimistic view of the economy but doesn’t fail to mention “the bull case for GBP.” With the bar set extremely low, an upside growth surprise could indeed give a boost to Sterling.
Nonetheless, Morgan Stanley’s economists agree with the overall market expectations of weak UK growth and even a difficult 2023. As Wanting Low, G10 FX, Strategist at Morgan Stanley said: “A bearish outlook for the UK has pretty much been a consensus view for the past few months, and remains so even as GBP staged an impressive rally against the USD in recent weeks.”
UK economic growth
The UK economy is expected to underperform as long as the energy crisis continues, hampering growth and keeping inflation elevated. However, a positive development would be a material fall in energy prices especially as high UK inflation is connected to increased energy prices.
After surging in June, UK gas prices have been trading lower the last few weeks of December and are close to levels last seen before Russia’s invasion of Ukraine.
Another factor that could boost growth and output is the return of workers to businesses since currently there are high vacancy rates. Despite increased immigration levels, there are persistent labour shortages.
With many EU workers leaving the UK and the arrival of non-EU workers, the jobs market has undergone significant changes resulting in a mismatch within the labour force and higher vacancies and labour shortages in certain sectors. Additionally, early retirement and an ageing population have also led to further labour shortages.
With limited economic activity, inflation is harder to control, growth slows down and more pressure is added on public finances. If this trend continues, then it would spell bad news for the economy and the pound. However, Morgan Stanley believes that if the labour market becomes tighter, then the pound could strengthen.
The pound could also gain, if UK consumers become more resilient, despite the cost of living crisis. UK consumers have already tapped into excess savings the past two years to boost consumption, but if they continue doing so then this will potentially boost growth.
While the majority of economists remain pessimistic about the pound and economic outlook, the new year may hold a few surprises.