Sterling set to be among the strongest currencies this year

The pound is on course to be one of the best-performing leading currencies in the world this year as strong economic growth in Britain and the change in government help to “dispel overly negative views”, leading American investment banks have said.

Sterling is predicted to hit a four-year high of $1.41 against the dollar by the end of next year, according to currency strategists at Bank of America, and to strengthen to a two-year high of $1.35 by the end of 2024.

The pound has risen by 3.5 per cent against the dollar this year, climbing to its highest level since March 2022 as traders bet on interest rate cuts in the United States but a more gradual pace of monetary easing by the Bank of England. Sterling stands at $1.31 at present and has strengthened by 22 per cent after hitting near-parity with the dollar at an all-time low of $1.03 in the aftermath of Liz Truss’s mini-budget in September 2022.

Currency analysts at Goldman Sachs said the pound’s gains were likely to continue thanks to the favourable interest rate environment and encouraging economic growth this year. They said Labour’s budget on October 30 also could drive up the value of UK assets if the government delivers on “fiscal credibility”.

The latest private sector surveys “suggest that recent solid growth momentum can continue”, Goldman said. “Firm activity data should help to dispel overly negative views on the UK and ultimately keep the Bank of England outlook relatively in line with peers, thereby bolstering sterling.

“Fiscal policy will move into focus as we head towards the budget statement at the end of October, but if the new government manages to find the narrow path between delivering on public investment and fiscal credibility, UK local assets could continue to be well-supported.”

Traders are betting on interest rate cuts from the US Federal Reserve and the European Central Bank this month, while the Bank is expected to keep the base rate unchanged at 5 per cent after reducing its rates in August. Investors expect at least three rate cuts in the US and another two in the eurozone this year, compared with only one more reduction in Britain before the end of 2024.

High interest rates help to support an exchange rate, allowing investors to borrow in a cheaper currency and invest in a more expensive currency, pocketing the difference.

Bank of America said that the pound was also on course to gain against the euro, after hitting a two-year high of €1.18 this month, and Goldman Sachs urged investors to bet on the pound rising against the Swiss franc.

George Buckley, chief European economist at Nomura, said that the UK economy was not facing labour market worries like the US or the “anaemic growth” of the euro area. “Divergence between the UK and its US and European counterparts is a theme as the Bank of England appears more calm, data outperforms and markets price an increasing wedge between the Bank and Fed and ECB rate cuts by the end of 2025,” he said.