In 2025, the British pound may exhibit divergent trends in the forex market. Both Commerzbank and Goldman Sachs hold an optimistic view on the pound against the euro, expecting it to continue its strong upward momentum. However, their forecast for the pound against the US dollar is relatively conservative, suggesting a more subdued performance. Analysts believe this difference is primarily driven by the varying economic fundamentals of the UK, the Eurozone, and the US, while domestic policy uncertainties in the UK might pose major risk factors for the pound's outlook.
Pound Expected to Maintain Strength Against Euro
Commerzbank states that the bullish trend for the pound against the euro (or the bearish trend for the euro against the pound) may extend into 2025 due to anticipated higher economic growth and inflation pressures in the UK compared to the Eurozone. The UK's fiscal policy, while boosting growth, also supports inflation. For example, the recent upward revision of inflation forecasts by the Bank of England indicates that despite a potential slowdown, the economy still retains resilience.
Goldman Sachs describes the pound as an "unpolished diamond," believing that 2025 will be a year of sustained strength for the currency. Their prediction indicates that the pound's rise against the euro will be driven by post-election economic recovery and relatively stable policies from the Bank of England.
Stable Performance Against the Dollar, Targeting 1.32
Compared to its strong performance against the euro, the pound's movement against the dollar might be more subdued. Commerzbank expects the pound to rise to around 1.32 against the dollar in 2025, but the overall strength of the dollar may constrain the pound's upward potential. Nonetheless, the UK economy may still provide some support, with Goldman Sachs noting that the pound's bullish trend could align with the broader rise of the dollar.
This expectation reflects the UK economy's predicament: while its growth and inflation levels are predicted to surpass those of the Eurozone, they significantly lag behind the US. This limits the upward pressure on the pound against the dollar.
Policy Risks May Impact Pound Performance
Despite a generally optimistic outlook, uncertainties in domestic policy could remain crucial factors affecting the pound's trajectory. Commerzbank warns that the UK's fiscal policy and potential central bank policy adjustments pose hidden risks to the pound's future performance. For instance, planned increases in employment taxes within the fiscal budget might negatively impact the economy. Employers might respond to tax burdens by reducing pay raises or increasing prices of goods, which could hinder economic growth or drive up inflation.
Moreover, the market widely anticipates a 50 basis point rate cut by the Bank of England in 2025, implemented in two stages, but Commerzbank suggests the actual cut might be smaller, adding uncertainty to the pound's movement.
Overall, in 2025, the pound is expected to continue its rise against the euro, supported by economic growth and inflation, while its performance against the dollar may remain relatively stable due to UK policy and the global economic context. As the Bank of England and government budget policies become clearer, the outlook for the pound will gradually come into focus, though vigilance is needed against potential risks from policy adjustments.
