The five major factors that will weigh on the pound in 2024 are UK inflation and the general election.

September 18 - Market analyst Gary Howes points to five unique bearish factors that could weigh heavily on the pound next year: the housing market and mortgage costs, uncontrolled inflation and the cost of living, a recession, Brexit woes, and the 2024 election surprise.

Despite some twists and turns, sterling is still one of the strongest performing major currencies in 2023. It has been the clear winner, supported by a tough Bank of England and good economic data from time to time. In addition, several leading forecasters are optimistic about the future prospects of the pound.However, 2024 will be an interesting year for those trading forex pairs with CFDs and other derivatives. The pound will face unique challenges next year. Although the UK is far from the only country facing economic uncertainty, it has a unique set of challenges to overcome.

Market analyst Gary Howes identified five unique bearish factors that could weigh heavily on the pound next year, as follows:

1. Housing market and mortgage costs

The UK's property market feels like a huge unknown. Home sales in the UK have already begun to slow. Many five-year agreements before the epidemic expire in 2024, when British homeowners must prepare for the impact of surging mortgage rates.

The British government has been cautious in providing support, although it may be forced to act in an election year, especially since many Conservative voters are homeowners.

Despite this, we saw in 2008 how mortgages were a catalyst for greater economic upheaval.

Although the UK is not the only country facing housing market difficulties, the UK economy and the pound sterling may be more sensitive to the housing market.

2. Uncontrolled inflation and the cost of living

The UK has been slower to reduce inflation than most other major economies.

Inflation in August 2023 is more than twice that of the United States (6.8% vs. 3.2%). But some worry that inflation will not remain low.

The hawkish tendencies of the Bank of England have exacerbated the strength of the pound in 2023, but there is only so much the central bank can do, and it will not raise interest rates permanently.

Many believe that inflation and the ensuing cost-of-living crisis have yet to affect the broader economy. But in the end, they will pay the price, leading to higher unemployment, a slowdown and a potential recession, all of which are unlikely to support the pound.

3. Economic recession

Overall, the UK economy has outperformed forecasters throughout 2023, proving resilient. However, in the summer of 2023, warning signs continue to emerge.

August's PMI data looked particularly grim, with the services PMI dropping to 48.7 and the manufacturing PMI dropping to 42.5, as inflation, the cost of living and difficulties in the housing market may finally start to affect the broader economy as well.

A think tank recently predicted a 60% chance of a recession after the next general election (to be held in 2024).

Others believe it is only a matter of time, not whether it will happen. The pound may not necessarily take a hit in a global recession, but many problems specific to the UK suggest it could be hit harder than comparable economies. Not least the continuing impact of the next factor, Brexit.

4. The Brexit dilemma

More than seven years after the Brexit referendum, the impact on the pound is still there, but some believe that Brexit will bring more pain.

As Britain rushes to negotiate a trade deal to make up for lost intra-European Union trade, apart from slowing growth, there are other structural issues weighing on the economy, including supply chains.

In a poll conducted last year, eight in 10 British companies claimed that Brexit would be more disruptive to supply chains than the war in Ukraine.

None of these factors put particular pressure on the pound, but their impact on the wider economy cannot be ignored.

5. 2024 election surprise

For sterling traders, the 2024 election represents a certain uncertainty. Markets expect a Labour government to gain a majority, but what that means for the pound is anyone's guess.

Despite the heated rhetoric, it appears that the government of Labour leader Sir Starmer will not be a radical one.

Indeed, it might feel like business as usual. This could be good for the pound, as it would portend five years of stability.

However, there are other factors that could weigh on the pound, including the new government's economic plans. Finally, there could be a surprise election, even if most pollsters disagree.

A Conservative victory looks unlikely, but that is not to say that Labour is bound to achieve unbridled success. Anything that smacks of unstable government is likely to deal a blow to the pound.

GBP/USD daily chart

At 15:48 on September 18, Beijing time, the pound was trading at 2381/82