The UK after Brexit has covered a long way from falling GBP prices to rebounding and making the country stable again. To forecast inflation for its currency we will have to dive into fundamentals. By analyzing various sectors including stock markets we will be able to see how GBP can perform in 2023. We will also include a list of several key macroeconomic indicators such as interest rates, CPI, monetary policy, labor market, PPI, and exchange rates.
Stock markets vs GBP how are the two correlated?
To predict inflation and other important market tendencies the only way is to monitor fundamental indicators. The fundamental analysis indicators such as Return on Equity, Earnings Per Share, Dividend Yield Ratio, Free Cash Flow, and others can determine the direction of the stock and give traders a precious edge against the markets. Stock markets are a measure of the economic heart rate of any country, especially developed countries like the UK. Usually when the currency is depreciating the stock markets are rising because there is more GBP needed to buy stocks and vice versa. But this is not always true and sometimes both markets can rise because of major global events. Brexit was one such event that shook all financial markets of the UK and the GBP tanked the most.
GBP fundamentals analysis for 2023
Consumer Price Index (CPI)
CPI measures the average price changes of a basket of goods and services over time and it can be used to determine the inflationary pressure on consumers. CPI was rising from 2021 to 2023 and it started to decline slightly after 2022 Oct. giving investors a glimpse of hope that inflation may slow down in 2023. So, in theory, there is a higher probability for CPI going down in 2023 which should decrease the pressure inflation holds on average citizens of the UK. Since CPI shows positive signs let’s analyze other important metrics to define what inflation will do in 2023.
Monetary Policy
The Bank of England (BoE) is a major player in the UK when it comes to controlling GBP prices. BoE’s actions and statements can have a direct impact on the GBP price and monitoring its announcements and decisions about fiscal policies can give traders the edge in trading and investors in their diversifying decisions. Money supply, changes in interest rates, and quantitative easing can directly change inflation. The quantitative easing (QE) in the USA forced the FED to increase interest rates eventually to stop rising inflation. The statistics predict the inflation rate to slow down and be way below the 2022 number. It was 9.1% in 2022 which is 0.9 points below the hyperinflation rate which is very dangerous for any economy even for the UK. The inflation in 2023 is predicted to slow down by some credible sources. It is predicted to go down to 6.1% which is not good but still much better than 2022’s numbers.
The UK labor market in 2023
Employment levels, wage growth, and labor market participation rates can provide a further glimpse into potential inflation pressure arising from increased labor costs. The employment rate was 75.9% in January and March 2023, 0.2% higher than in 2022 Oct. This shows how slightly its employment rate increased, and how it could potentially slow inflation further down in 2023. This increase is very minuscule but still slightly positive. So, the labor market is not going to negatively affect the inflation rate in 2023 which is good news for the UK fiat currency.
UK inflation in 2023 predictions
From credible sources to our brief fundamental overview the findings are predicting the inflation to go down in 2023 for the UK Pound. Knowing the probability of GBP strengthening against other currencies because of lower inflation can help traders better manage their risks and better predict the markets. The main trend is going to be bullish for the GBP currency in 2023 because of slowing inflation rates. Meanwhile, the USA is facing a debt ceiling which makes USD very unstable and weakens it against other currencies. Combining these two findings it seems clear that GBPUSD is going to go up in 2023. We can never predict the exact scenario but the probability of GBPUSD rebounding and going higher in 2023 is higher than USD strengthening, at least in the medium-term horizon. All in all, the inflation outlook seems very positive for the Pound Sterling in 2023.
Key Takeaways
Brexit has made the GBP tank some huge bearish movements.
Stock markets can be negatively correlated with the GBP, and rising inflation could lead to rising prices in the stock markets of the UK.
Central bank interest rates, CPI, monetary policy, labor market, PPI, and exchange rates can be determining fundamental indicators in measuring the pulse and trend of the UK Pound Sterling
Return on Equity, Earnings Per Share, Dividend Yield Ratio, and Free Cash Flow are among the indicators affecting the stock markets and traders and investors monitor them closely.
Consumer Price Index (CPI) appears slightly bullish for the GBP as it shows slowing down pressure on the average UK citizen.
Credible sources predict the inflation in 2023 to slow down to a 6.1% a huge decrease from 2022’s 9.1%
Labor market of the UK shows very minuscule bullish sentiment and can be a small contributing factor to a stable environment for the GBP in 2023
