Pound Sterling Resilient Against Euro and Dollar Amid Stronger-than-Expected Economic Performance

According to Bank of America, the Pound is expected to maintain its strength despite the unfavorable economic outlook in the UK. The bank, known for its bearish stance on the Pound, has revised its forecasts due to the economy’s better-than-expected performance and a series of positive data surprises, which have led to increased UK bond yields and a stronger Pound.

Bank of America’s foreign exchange research note acknowledges the perplexing solid performance of the GBP, considering the weak growth and higher inflation in the UK. However, despite the weak data, the UK numbers have surpassed very low expectations.

As part of its mid-year currency market assessment, Bank of America has made several forecast changes. The bank has revised its projection for the EUR-GBP exchange rate lower, now expecting it to hover around the 0.85 level by the end of 2024, compared to the previous forecast of a gradual increase to 0.91 over the long term.

Similarly, the Pound to Dollar exchange rate (GBPUSD) is anticipated to strengthen next year as the US Dollar weakens, influenced by the Bank of England’s supportive measures in containing inflation through higher interest rates.

Bank of America’s economists predict that the Bank of England will raise the Bank Rate by three more 25 basis point hikes, bringing it to 5.25%. The bank also factors in improved clarity regarding the post-Brexit regime, better relations with the European Union, and a significant reduction in associated risks.

Based on these assessments, Bank of America forecasts the GBPUSD exchange rate to reach 1.24 by the end of 2023 and gradually appreciate to 1.35 over the course of 2024. Furthermore, EURGBP is projected to end the current year at 0.85 and remain relatively stable at this level throughout 2024.