Goldman Sachs has predicted that the pound will surge to its highest level against the US dollar in over three years, buoyed by strong UK economic growth and a gradual reduction in interest rates by the Bank of England.
The US investment bank predicts that sterling will rise to $1.40 within the coming year, a substantial jump from its present value of $1.33 and exceeding its earlier forecast of $1.32.
Goldman also anticipates that the pound will be among the top-performing currencies against the US dollar over the coming year, with the euro also rising to $1.15 from $1.11.
Goldman states that the Bank of England’s gradual approach to reducing interest rates, as opposed to other central banks’ more drastic cuts, will play a significant role in strengthening the pound. The Bank decided to keep the interest rates at 5% last week, compared to the US Federal Reserve which lowered its standard rate to between 4.75% and 5%. In the past, higher interest rates have typically increased the demand for a currency by providing superior returns on investments such as bonds.
Analysts from Goldman Sachs highlighted that the “solid growth momentum” of the UK will contribute to the rise of sterling, particularly as a strong US economy boosts global demand for riskier assets like the pound. They also noted that decreased political instability under the Labour government is another factor that brings stability, as faith in the currency recovers after the upheaval caused by the Truss administration’s mini-budget in September 2022.
Rachel Reeves, the Chancellor, reinforced Labour’s commitment to driving economic growth in her speech at the party’s conference, marking the first time a sitting chancellor has spoken at the event in 15 years. Reeves pledged an ambitious budget on October 30 that would reject austerity while prioritising public investment and working in tandem with the private sector to bolster the economy.
Nonetheless, she recognised the necessity for stringent fiscal choices, referencing a £22 billion deficit left by the previous government. Labour intends to tackle this through a blend of tax hikes and spending modifications.
Pound set to reach highest level against US dollar since 2021, says Goldman Sachs (bmmagazine.co.uk)
