The British pound is anticipated to continue its upward trajectory against the US dollar, fueled by expectations of more gradual interest rate cuts in the UK compared to the United States and the Eurozone. Bank of America projects the pound will reach $1.41 by the end of 2025, building on its recent surge to a 29-month high of $1.323. As of Monday morning, sterling stood at approximately $1.314, reflecting a 3.2% increase against the dollar this year.
This rise is largely attributed to the market’s belief that the Bank of England will proceed with slower rate cuts than the Federal Reserve and the European Central Bank (ECB). The Fed and ECB are both expected to lower borrowing costs later this month, amidst signs of slowing growth and rising unemployment in the US. In contrast, the Bank of England is predicted to maintain its base rate at 5% during its upcoming meeting on September 19, following its first rate cut since 2020 last month.
This cautious approach by the Bank is supported by a potentially tightening UK labor market, which could prompt a more measured pace of monetary easing. Bank of America forecasts that the pound will climb to $1.35 by the end of 2024, with the UK’s next rate cut anticipated in November. The financial institution expects four quarterly cuts throughout 2025 and two additional cuts in 2026, eventually bringing the base rate down to 3.25% by mid-2026.
Additionally, the pound is expected to strengthen against the euro, having already gained nearly 3% against the European currency this year. In July, sterling reached a two-year high against the euro, and further gains are likely as the Bank of England’s policies diverge from those of the ECB. Market analysts believe that at least three rate cuts by the Fed and two by the ECB will occur before the end of this year, compared to just one by the Bank of England. This divergence in monetary policy is likely to keep the pound on its current upward path, making it one of the top-performing major currencies globally.