Analysts think the pound will continue its strong start to the year in the months ahead thanks to the UK’s relative political stability and a resilient economy.
Sterling has been one of the strongest performing currencies this year on the back of sticky inflation and stronger than expected growth.
So far the pound has climbed 1.5 per cent against the mighty dollar, climbing above $1.30 last week for the first time in more than a year. This makes it the strongest performing major currency against the dollar.
Against the euro, the pound is trading at its strongest position since August 2022, having gained over three per cent.
A number of analysts think that sterling’s out-performance could continue in the months ahead. According to the US Commodity Futures Trading Commission, a record number of currency speculators are taking a long position on the currency.
Amundi, one of the world’s largest asset managers, has turned bullish on sterling with the asset manager’s head of global FX, Andreas Koenig, describing his faith in the pound as a “core conviction”. Koenig thinks the pound could rise as high as $1.35 by the end of the year.
“You have an improvement in the economic environment, and you have a relatively stable government, so you have a lot of arguments in favour of sterling” – Koenig
Unlike France and the US, the UK will almost certainly have a centrist government for the foreseeable future. The UK economy has also outperformed expectations this year, growing 0.7 per cent in the first quarter of the year.
Analysts at Goldman Sachs also think that the pound’s rally could continue, largely due to the UK’s political stability. This makes the pound a less risky bet than a number of other currencies.
Although there is a reasonable chance that the Bank of England starts cutting interest rates in August, the analysts thought this was “unlikely to penalise the pound too much” given the Fed is also likely to start cutting rates in September.
“The currency should continue to be supported by our more benign broader global macro outlook, and with less of a drag from domestic monetary policy or political and fiscal uncertainty than in recent years,” they said.
Chris Turner, ING’s global head of markets, was less convinced that sterling could continue its rally if the Bank cut rates in August.
August’s rate meeting will be the “first big opportunity since the UK election to hear what the BoE are really thinking”, Turner said, so it could be a “downside risk”.
Turner was also much less convinced that sterling’s strength was primarily a result of political stability and better relations with the European Union, suggesting it was more down to “sticky UK inflation”.
JP Morgan FX strategists warned that sterling was “very clearly at risk of any deterioration in its local outlook,” for example if there was uncertainty about the direction of monetary policy.
However, the Wall Street giant stuck by its forecasts for the pound to hit $1.35 by March next year.