December 22, 2024 – Written by Frank Davies
STORY LINK Pound to Dollar Rate 2025 Forecast: Plunge to 1.17 or Rally to 1.38?
Currency exchange strategists at Nordea forecast that the Pound to Dollar exchange rate (GBP/USD) will slide to 1.17 by the middle of 2025 which would be the lowest reading since November 2022.
Bank of America still expects GBP/USD to advance to 1.38 at the end of 2025.
Nordea expects relative growth rates will support the dollar and added; “There is also the potential for an even stronger dollar in the scenario of an aggressive trade war between the US and the rest of the world.”
The bank would not be surprised if tariffs pushed EUR/USD below parity and this would inevitably be an important hurdle for GBP/USD.
During the week, The Federal Reserve and Bank of England rate decisions were in line with consensus forecasts, but there was divergence between the market reaction with a hawkish Fed stance and a dovish BoE tone.
Following the decisions, GBP/USD slumped to 6-month lows below 1.2500 before settling around 1.2540.
The BoE held interest rates at 4.75% at the latest policy meeting which was in line with strong consensus forecasts.
There was, however, an unexpected 6-3 vote for unchanged rates as Dhingra, Ramsden and Taylor voted for a cut.
The vote plot and statement triggered stronger expectations of a cut in February and the Pound lost ground, especially with reservations over the economic outlook.
HSBC is not convinced that high inflation will support the Pound; “The loss of momentum in activity should also be taken into account. The growth/inflation mix in the UK is a challenge to GBP.”
ING expects a BoE shift next year; “we expect 150bp of cuts, against market expectations for around 55bp.”
It added; “In the FX market, we expect any GBP weakness in the near term to be mostly channelled via GBP/USD.”
According to Bank of America; “heading into 2025, we think the case for further GBP gains are likely. Less restrictive fiscal policy and higher for longer rate should add to the case for GBP resilience particularly versus low yielding currencies.”
The Federal Reserve cut interest rates by 25 basis points to 4.50% at the latest policy meeting which was in line with strong market expectations.
There was, however, a notable shift in interest rate forecasts by the individual committee members. The median forecast was that the Fed will only cut rates twice during 2025 compared with the September projection of four cuts.
Fed Chair Powell also expressed some reservations over recent inflation trends while there was no urgency in cutting rates further towards a neutral level.
Nordea sees limited scope for Fed rate cuts; “We see March 2025 as the last cut in this cycle and there is also a risk that the Fed will not even cut next year at all.”
Standard Chartered commented; “The market is still digesting the hawkish message. The USD exceptionalism case is likely to remain intact until data show that it is overdone.”
The US is close to a government shutdown and Nordea did note potential political risks to US currency; “This week’s events suggest that Trump is not in full control of the Republicans, and it is not at all clear that all his wishes are able to pass Congress, where Republicans will have razor-thin majorities, especially in the House, next year.”
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