2014
Sterling-US Dollar
Quarterly Forecast
April - June 2014
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In this forecast:
• Review of UK and US economies
• Looking ahead to the rest of 2014
• Currency forecast for sterling-US dollar
CURRENCY BUSINESS
2014 Sterling-US Dollar Quarterly Forecast
Introduction
2014 has been a varied year for major economies worldwide. From baby steps towards a freer float
for the Chinese renminbi to the crisis in Ukraine that temporarily strengthened safe-haven currencies,
currency markets were expected to benefit from their respective economies recuperating from years
weighed down by a global recession.
Approaches to recovery have differed among countries, with varying results. At the heart of this are
decisions made by central banks, particularly for major world economies. Read on to discover how
these played out for the UK and US in the first quarter of 2014, as well as for what’s in store for the
two economies for the remainder of the year.
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2014 Sterling-US Dollar Quarterly Forecast
UK – Towards Sustainable Growth
The UK economy leapt into 2014 with renewed vigour, accompanied by improved growth prospects
and a strengthening sterling. Unemployment in the first quarter of 2014 fell as low as to 7.1%, just
0.1% shy of the Bank of England (BoE)’s target of 7%, the point at which the central bank would
consider raising interest rates. This was followed by a change of strategy as BoE Governor Mark
Carney announced a new forward guidance plan that would include eighteen indicators of economic
growth, rather than just unemployment. Carney justified the decision by pointing out ‘slack’ in the
labour market – that is, unutilised resources that could be put towards productivity and growth.
Meanwhile, the UK’s overall growth projections rose steadily in the first quarter of 2014, with an
estimate of 2.4% in December upgraded to 2.7% in March. Chancellor George Osborne hailed the
rosy outlook, but cautioned that more will need to be done in order to ensure sustainable economic
growth. Despite being one of the quickest world economies to improve post-recession, the UK still
has a mountain to climb before it is in the clear. The first few months of 2014 have shown that the
bulk of this climbing has already begun.
US – Improving After False Start?
The stage had been set in December 2013 for an economic comeback for the US economy. The
US Federal Reserve had started reducing contributions to its quantitative easing (QE) programme,
which acted as a crutch for the economy by providing it with monthly injections of capital. This should
typically be done when a central bank is confident that the economy is on its way to functioning
effectively without external funding, and was partly influenced by unemployment falling to 7% towards
the end of last year, nearing the 6.5% target set by the Federal Reserve.
The US economy had high hopes going into 2014, but it soon seemed that any improvements made
for a false start, with mixed results that did not demonstrate consistent growth. This was largely
affected by severe wintry conditions in parts of the country, which impeded production. The central
bank also saw the baton of leadership pass to Janet Yellen, its new Chair. Yellen has continued to
taper the QE programme by $10 billion a month, which suggests that the US economy may be
improving faster than sentiments may suggest, particularly since the recent departure of winter and its
accompanying challenges.
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2014 Sterling-US Dollar Quarterly Forecast
In Brief:
January-March 2014
2014 GBP/USD Rates
4
Month
Average
High
Low
January
1.6468
1.6588
1.6353
February
1.6546
1.6748
1.6306
March
1.6629
1.6738
1.6484
Year
1.6548
1.6691
1.6381
2014 Sterling-US Dollar Quarterly Forecast
Looking ahead to
the rest of 2014
Key economic factors that could affect the UK economy for the
remainder of 2014
• Median forecasts suggest that sterling will weaken against the US dollar, to £1/$1.6350 in 12
months’ time.
• The demotion of unemployment as the main indicator for a BoE decision on an interest rate hike
and the central bank’s revised strategy to include eighteen indicators will potentially delay a rise in
interest rates.
• A strong pound could end up devaluing the UK’s export competitiveness, a scenario that would
hurt the Government’s drive to increase exports to £1 trillion by 2020.
• As the UK’s largest market for exports is the Eurozone, any further floundering of the Eurozone
economy will have an adverse impact on UK exports. The opposite is also true, but less probable.
• There is speculation that sterling has been ‘overbought’, rendering it susceptible to a sharp
depreciation or ‘market correction’.
Key economic factors that could affect the US economy for the
remainder of 2014
• An improvement in weather stateside should allow the economy to start recovering from the blow
incurred during the wintry season that it experienced in the first quarter of 2014.
• The US Federal Reserve is expected to continue to taper QE by $10 billion at each upcoming
meeting, until the October meeting. At this point, the focus is expected to shift to when the central
bank can potentially hike interest rates. This should lead to a stronger US dollar.
• Inflation is expected to remain low throughout 2014, meaning that there is little pressure on the
Federal Reserve to raise interest rates in the short term. This would limit the US dollar’s potential
strength.
• Economists are forecasting a strengthening US dollar; this could damage US export
competitiveness and, in turn, US growth.
• China’s widening of the yuan’s trading band against the US dollar earlier this year will encourage
two-way market fluctuations. Although the yuan is currently adjusting to this relatively freer float,
any consistent, significant strengthening of the Chinese currency could cause problems for the
US dollar.
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2014 Sterling-US Dollar Quarterly Forecast
Currency Forecast
2014 Major Bank Forecasts – GBP/USD
6
Institute
1 Month
3 Months
6 Months
12 Months
Barclays
1.6400
1.6300
1.6500
1.6500
HSBC
1.6461
1.6116
1.5487
1.4717
Goldman Sachs
-
1.6800
1.6900
1.6500
Lloyds
1.6600
1.6700
1.6500
1.5900
Morgan Stanley
1.6600
1.6500
1.6400
1.6000
Nomura
1.6700
1.6900
1.6800
1.6800
RBS
1.6650
1.6500
1.6433
1.5488
Median
1.6600
1.6585
1.6400
1.6350
Minimum
1.6200
1.5500
1.5100
1.3600
Maximum
1.7000
1.7100
1.7500
1.7600
Smart Estimate
1.6650
1.6500
1.6433
1.5488
2014 Sterling-US Dollar Quarterly Forecast
Forecast Chart
Predicting currency movements is not an exact science. Forecasts from major financial institutions for
the GBP/USD rate vary dramatically, with a predicted median of £1/$1.6350 in twelve months’ time.
There is also a marked difference between the minimum rate of £1/$1.3600 and maximum rate of
£1/$1.7600 listed by the banks. This means that for every $1 million changed to sterling, you could be
nearly £170,000 better or worse off!
GBP/USD - 2014 Forecast
GBP/USD Interbank rate
1.68
6 Months
1.6433
1.63
1 Month
1.6650
3 Months
1.6500
1.58
12 Months
1.5488
1.53
1.48
01 Jan 01 Mar 01 May
2013
2013
2013
01 Jul
2013
01 Sep 01 Nov 01 Jan 01 Mar 01 May
2013
2013
2014
2014
2014
01 Jul
2014
01 Sep 01 Nov 01 Jan 01 Mar
2014
2014
2015
2015
Forecast accurate from 10th April 2014. Data taken from Reuters’ poll.
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