The pound is set to be one of the world’s top-performing major currencies this year amid expectations of “above trend growth” in the UK economy and slower interest rate cuts, according to Bank of America.
The Wall Street titan said the pound is poised to hit $1.41 by the end of 2025, after hitting a 29-month high of $1.323 last Tuesday.
Sterling is worth around $1.314 as of Monday morning. It has jumped 3.2 per cent against the dollar so far this year as money markets bet on more gradual interest rate cuts from the Bank of England compared to the US Federal Reserve.
Traders are betting that the Fed and European Central Bank will lower borrowing costs later this month. Growth has slowed in the world’s largest economy while latest jobs figures also showed a worrying rise in unemployment.
In contrast, the Bank is widely expected to hold its base rate at five per cent at its next meeting on 19 September after cutting rates for the first time since 2020 last month.
Bank of America estimated sterling would touch $1.35 by the end of this year as a possible tightening of the UK labour market gives policymakers reason to ease monetary policy more slowly.
Markets are betting on at least three Fed and two ECB rate cuts before the end of this year, compared to just one for the Bank.
Bank of America expects the UK’s next rate cut to come in November, followed by four quarterly cuts in 2025 and two cuts in 2026 – resulting in a 3.25 per cent base rate by the middle of 2026.
The US lender also forecasts the pound will rally against the euro, after hitting a two-year high in July. Sterling has gained nearly three per cent against the euro so far this year.