January 26, 2025 – Written by Frank Davies
STORY LINK Pound to Dollar Rate Forecast Warning: Risk for GBP/USD Slide to 1.15
Foreign exchange analysts at Nordea expect dollar strength to dominate for much of the year. It sees the risk of GBP/USD sliding to at least 1.15 with an end-2025 forecast of 1.17.
In contrast, Bank of America expects GBP/USD gains to 1.38.
US data did not have a significant impact during the week, although a weaker-than-expected business confidence report did undermine the US currency on Friday.
The primary attention was on President Trump’s policy agenda. His call for lower interest rates and no immediate move to impose tariffs helped trigger a correction for the dollar.
UK data was mixed with more substantial earnings growth offset by weaker consumer confidence and mixed business confidence data.
UK bonds were relatively stable, which helped underpin the Pound amid an element of short-covering
In this environment, the Pound to Dollar (GBP/USD) exchange rate posted significant gains to 1.2480 from 1.2170.
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According to Nordea, “We expect that the strong US economy and weak economic activity in the rest of the world will lead to a strong dollar year. The economic gap might even grow larger and result in an even stronger dollar.”
Nordea also expects that US trade policies will support the dollar.
It added; We think EUR/USD will fall down to parity, but would not be surprised if the economic gap widens and the currency pair drops below parity.
GBP/USD will inevitably struggle if EUR/USD slides below parity.
ING noted that in real terms, the dollar is at 40-year highs, maintaining speculation that the Administration will look to drive the currency lower.
According to the bank, “We cannot see that happening this year, although Washington may try to find a way to get trading partners to strengthen their currencies under the threat of tariffs. Such a policy could just about be read as consistent with also wanting to maintain the dollar as the pre-eminent reserve currency.”
Nevertheless, it added, “For the time being, however, the narrative of US exceptionalism is alive and well, the tariff threat remains real and we doubt the Fed will knock the dollar off its perch.”
Morgan Stanley sees scope for a dollar reversal; “While dollar bulls are numerous and perhaps most vocal in expressing their views, there seems to be a more ‘silent’ plurality of investors looking to sell the dollar instead. Many have dry powder and are waiting for a sign to enter shorts.”
It added, “Investors may be far more willing to add dollar shorts sooner and with higher conviction than dollar bulls may anticipate,” wrote the strategists. “For them, it’s more a question of timing rather than direction.”
Bank of America considers that the Pound is oversold with scope for a solid recovery; “we believe that there appears to be a large dose of “never let the facts get in the way of a good story” to price action.
It added, “This potentially reflects a number of factors, some of which are beyond the remit of this note, but we do think that the “glass half-empty” approach to the UK outlook appears to be the default position for markets, perhaps a legacy from a decade of political and macroeconomic uncertainty and amplified by September 2022.”
The bank expects stronger relations with Europe to help trigger a rebound in pound confidence, especially with positive yields.
MUFG, however, expects the Pound will be vulnerable; “Further evidence of a softening UK labour market this week alongside the loss of growth momentum at the end of last year will keep pressure on the BoE to cut rates further.”
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TAGS: Currency Predictions Pound Dollar Forecasts
