Our outlook for the pound is bifurcated. As it becomes clear that post-pandemic price dynamics are not reflective of a post-Brexit structural break, and are instead simply lagging those seen on the Continent, we expect the exchange rate to fall in line with relative rate differentials. A pullback to sub-1.25 levels is not beyond the realm of possibility in the first quarter.

But in the longer term, we think underlying economic resilience could keep yield differentials surprisingly well supported. According to recent data revisions, the British economy managed to outperform both France and Germany through much of the post-pandemic period, and some measures of consumer and business sentiment are pointing to a modest re-acceleration in growth early in 2024. The deeply-unloved pound could steer a (bumpy and frequently-reversed) course above the 1.30 threshold against the dollar as it sheds some of the negativity that has become embedded in valuations over the last few years.

Estimated GBPUSD Expiration Range by Confidence Interval