How will Pound Sterling perform in 2023

Roll back 12 months, the Pound is at 1.35 and 1.19 against the US Dollar and Euro respectively. Even with the known headwinds, a year ago few forecasters would have predicted Sterling flirting with parity against the US Dollar and Euro.

Whilst Sterling may only end the year trading 5% lower against the Euro (compared to January), it has deviated over 13% in that time. Versus the US Dollar, Sterling has deviated over 25%. This extreme volatility adds another challenge for businesses. Seeking support to interpret currency markets and have a foreign exchange strategy, is now vital for large and small businesses alike.

With the Markets more accepting of the UK’s third Prime Minister of 2023, Rishi Sunak, and it’s forth Chancellor Jeremy Hunt, Sterling should go into 2023 with less of a hangover from the short-lived debacle of their predecessors, Liz Truss sand Kwasi Kwarteng.

By publication, we will have digested Jeremy Hunt’s budget, and as I write it looks like a broad base of tax rises, scrapping of key projects, combined with spending cuts are on the cards. Fiscal drag tax rises will hit middle earners upwards, lowering of 45p tax band and reducing tax breaks on pension contribution are set to impact those on higher incomes.

Sunak and Hunt and are walking a tight rope, overcompensating for Trussonomics risks making the recession deeper. Cameron and Osbourne doubled down on austerity, lowering growth for the next decade, with the legacy to UK finances and public services still be felt today.

Brexit and Trussonomics, two massive self-inflicted recalibrations for Sterling, now temper the expected upside. Should UK policy makers (Government and Bank of England) not score any own goals, the 2023 barometer for the Pound will be resilience to high inflation, energy prices, power supply and elevated interest rates. Recession is now a given, if shallower that expected and Sterling remains even, a deeper downturn and outperformed by Europe, Sterling again will test the lows of 2022.

The US Dollar surge of 2022 weighs heavy on inflation in the UK, Europe and beyond. Coordinated intervention by Central Banks may be out of favour however a nudge through policy, slowing down interest rate rises should be expected. For Sterling the immediate market consensus is to track back up to 1.24 against the US Dollar by January 24 and to remain flat against the Euro. As ever the range of opinions from forecasters is wide, US Dollar 1.38 to 1.10 and Eur 1.46 to 0.92.

With certainty volatility will remain, Sterling will swing in favour when risk sentiment is high. Good UK data provides some upside potential; however Sterling is not its own a driver and sentiment towards the Euro area and America provides the direction. Feel free to reach out with your thoughts on where Sterling will be through 2023, we’d love to hear you.

Exporters have been benefiting from the depreciating pound, however alongside importers reviewing the costs being incurred and the strategy of managing currency exposure becomes even more important. As such, specialist support as provided by companies like Ascendant, can fill a gap not provided by larger financial institutions.

For more information on how Ascendant can benchmark your current supplier and to hear about how we are reducing the cost of foreign exchange for local businesses, contact karen.benson@ascendant.world