Pound to Dollar Rate 2025 Outlook: All eyes on Washington
The Pound to Dollar (GBP/USD) exchange rate slumped to 8-month lows below 1.2400 on the first trading day of 2025.There is a consensus that US policies will help keep the dollar firm early in 2025.
The domestic and global consequences of Trump’s policies will be a key GBP/USD element this year.
On the US side, UBS is not convinced that economic strength will be sustained and expects GBP/USD gains; “For growth, we see downside to that number given the expected decrease in government consumption and as elevated real rates weigh on gross fixed capital formation.
So the two cuts the market is pricing for 2025 may prove too few.”
It is one of the few bullish investment banks and forecasts that GBP/USD will strengthen to 1.34 at the end of 2024.
ING sees scope for initial Pound resilience, but expects a more aggressive Bank of England policy will weaken the Pound later in the year with GBP/USD ending the year at 1.24.
Danske Bank (CSE:DANSKE) expects sustained dollar support during the year with GBP/USD ending the year at 1.22.
There is a high degree of uncertainty, especially surrounding the impact of US Administration policies under President Trump.
UBS notes the risk of elevated volatility and more extreme developments; “US President-elect Trump’s stated aim of aggressively taxing US consumers via tariffs is an example.
Markets are not pricing in the inflation and growth consequences of policy pledges becoming reality, and assume dilution.
The shift in immigration policy from Trump’s advisor Musk can be cited as a parallel—economic reality tempering political rhetoric.”
There are also multiple geo-political uncertainties including the Russia/Ukraine developments and the Middle East while the Chinese outlook remains a key global uncertainty.
UBS added; “Investors’ assumption that economic reality will limit political extremes is evident elsewhere— China and Germany, for example.
As polarization reduces the middle ground, it is inevitable that markets have to pick a side rather than a compromise.
But if markets pick the wrong side, the economic fallout will be more dramatic.”
The imposition of US tariffs and the reaction, especially for China, could trigger global currency wars and a slide in risk appetite, both of which would have major implications for the Pound.
In this context, investment bank projections for major currencies are relatively narrow and there will be an important risk of much more substantial moves during the year.
ING expects near-term Pound resilience; “The steady increase in US trade tariffs through 2025 stands to weigh on the currencies of the smaller, open economies and the commodity producers.
The outperformers in the G10 space (within a broadly stronger dollar environment) will be the undervalued Japanese yen and – for the first quarter – probably sterling, too.”
Bank of England (BoE) policies will also be very important for the Pound.
There is a consensus that the BoE will cut rates at the February meeting.
Markets are, however, only pricing in two full cuts for the year.
ING expects the BoE will shift to a more aggressive stance later in the year; “We think that softer UK services data will not emerge until February, suggesting GBP/USD may hold onto gains until then.