ExchangeRates.org.uk - The Pound to Dollar (GBP/USD) exchange rate stalled above 1.28 in early December and has retreated to around 1.2650.MUFG expects dollar strength will push GBP/USD below 1.25 early in 2025 before a recovery to 1.30 at year-end as the US currency loses traction.
The bank expects that Trump’s economic policies will put upward pressure on inflation in 2025.
In this context, it expects that the Federal Reserve will only have scope to cut interest rates to 4.00%.
Although it considers that Trump policies are priced in to an important extent, it sees scope for the dollar to secure further net gains in the first half of 2025 before a retreat over the second half of the year as the economy starts to struggle.
As far as the UK economy is concerned, MUFG notes that the government budget has front-loaded spending increases with GDP growth of 1.5% next year.
With persistent reservations over inflation, the bank expects that the Bank of England will have to maintain a relatively restrictive stance, underpinning the Pound.
The bank expects GBP/USD will struggle under the weight of dollar strength in the first half of 2025 before regaining ground later in the year as the US currency struggles.
Key Quotes:
"The pound is currently the top performing G10 currency in 2024."
"Growth is set to pick up from an expected 0.9% this year to 1.5% in 2025."
"The new Labour government has not got off to a good start with unpopular tax increases."
"Government spending will be front-loaded, which will help support the economy next year."
"The labour market will be the primary focus for the BoE."
"We expect new EUR/GBP lows not seen since the Brexit referendum in June 2016."
"Broader US dollar weakness will see GBP gain more versus the US dollar."
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