With 2023 almost here, the million-dollar question is whether the GBP/USD will continue its recovery or not. Will we see a move towards the safe-haven demand favoring the USD? All of these questions are important, and we can't answer that without looking at the economic situation of the world.
The 4th quarter of 2022 was favorable for the Pound Sterling (GBP) as it managed to gain 11% against the USD. But let's also remember that GBP also lost around 25% against the USD during the first 9 months of 2022.
During the month of September, GBP/USD pair was down by 15% which was also one of the worst times for the GBP markets.
Looking ahead, the rate hikes will extend even in 2023 in the USA as well as the United Kingdom (UK). And both of these countries are also struggling with inflation - So, on that front, there's a common theme shared by both countries. But the Fed is most definitely ahead of the curve when compared with the Bank of England.
According to the tool which watches the Fed rates, the markets believe that the Fed rate will not be higher than 4.75% by the end of 2023. So on that front, there's a chance that it will put a stop to the bearish USD.
Overall, the economic situation in both countries is not looking good. So this means that it is now a comparison of which country has the worst economic conditions. On top of that, the central bank which raises its policy rate the most will be the one to gain the upper hand in this battle between the GBP and USD.
So by looking at the conditions that might unfold in 2023, the forecast favors USD a lot more than the GBP. In short, the GBP/USD pair will experience further downside during the 2023. But should the economic condition detrioates further in the USA when compared with the UK, then the situation can also take a 180 degree turn.