Goldman Sachs expects the pound to rise to its highest level against the US dollar in more than three years, supported by strong economic growth in the UK and a gradual reduction in interest rates by the Bank of England.
The US investment bank expects the pound to reach $1.40 next year, a big jump from its current value of $1.33 and exceeding its previous forecast of $1.32.
Goldman also expects the pound to be among the best performing currencies against the US dollar over the coming year, with the euro also rising to $1.15 from $1.11.
According to Goldman, the Bank of England’s “patient” approach to cutting interest rates, in contrast to the more aggressive cuts by other central banks, will be the main driver of sterling’s strength. Last week, the bank chose to keep interest rates at 5%, while the US Federal Reserve cut its benchmark rate to a range of 4.75% to 5%. Historically, higher interest rates tend to boost demand for the currency by offering better returns on investments such as bonds.
Goldman Sachs analysts also noted that “strong growth momentum” in the UK would fuel a rise in sterling, especially as a strong US economy increases global demand for riskier assets like the pound. Lower political volatility under a Labour government is another stabilizing factor, with confidence in the currency recovering after the turmoil of the Truss administration’s mini-budget in September 2022.
Chancellor Rachel Reeves has reaffirmed Labour’s commitment to driving economic growth in her speech at the party conference, the first time a sitting chancellor has spoken at the event in 15 years. Reeves pledged an ambitious budget on 30 October that rejects austerity while prioritising public investment and working alongside the private sector to support the economy.
However, she acknowledged that tough fiscal decisions would have to be made, citing the £22 billion deficit inherited from the previous government, which the Labour government plans to address through a combination of tax increases and spending adjustments.