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Corpay releases forecasts for the GBP/USD and GBP/EUR exchange rates.
The British pound is likely to experience a volatile year, with initial weakness followed by a potential recovery.
This is according to Corpay, the global financial payments firm, which has released its 2025 forecasts for the major currencies.
Karl Schamotta, Chief Market Strategist at Corpay, says the British pound is set for a turbulent 2025 owing to a mix of domestic economic challenges, potential interest rate cuts, and international factors, including U.S. policy changes.
While the start of the year may be difficult, there are factors that could support a recovery later in the year and GBP/USD could breach the 1.30 threshold is possible by year-end.
Initial Weakness
The pound is expected to experience a turbulent start to the year, with a potential for weakness against the dollar amidst a loss of economic momentum
The UK economy slowed sharply over the second half of 2024, leading to softening labour markets, wage pressures, and lower inflation expectations.
Bank of England Rate Cuts: The Bank of England (BoE) is expected to cut interest rates more aggressively than markets anticipate. This will limit the extent to which interest differentials can support the currency against the euro.
"We think the Bank of England will cut rates more aggressively than markets anticipate in the near term, limiting the extent to which interest differentials can support the currency against the euro," says Schamotta.
Consumer Spending: With Bank Rate projected to fall well below 4%, consumers should experience a substantial improvement in real disposable incomes, adding to an already resilient demand backdrop.
Potential for Dollar Strength: If the US dollar gains in the first quarter, the pound could suffer along with other global currencies, says Corpay. The trade protectionist policies of Donald Trump are widely cited as being a potential source of support to the Dollar in the coming year.
This can put Pound-Dollar under pressure.
Services-Focused Economy: Underpinning Sterling's resilience is the UK's services-focused economy. This offers some insulation against a turn toward trade protectionism in the US, especially when compared to goods-dependent countries in the Eurozone.
Fiscal Policy: Corpay says the Labour government's expansionary fiscal policy is likely to provide a strengthening tailwind to growth as the year progresses.
Potential for Recovery: Despite the initial challenges, Corpay analysis shows the pound can recover as the year progresses. A recovery is expected once markets have more soberly evaluated the likely direction of US policy.
The forecast for the Pound to Dollar pair in the source is 1.27 in Q1, 1.28 in Q2, 1.29 in Q3, and 1.30 in Q4.
"We think the pound could suffer along with its global counterparts if the greenback adds to its recent gains in the first quarter, but expect that a recovery will begin once markets have more soberly evaluated the likely direction of US policy," says Schamotta.
Possible Euro to Pound Scenarios
Early 2025: The Euro may initially struggle against the Pound due to the Eurozone's economic issues and the anticipated European Central Bank (ECB) rate cuts.
However, the Pound is also facing its own headwinds, meaning there may not be a decisive move in either direction initially.
Mid- to Late-2025: As the year progresses, the Pound's recovery, driven by fiscal policy and potential consumer spending increases, could see it outperform the Euro.
However, a Eurozone recovery based on increased spending and investments could counter this.
The derived EUR/GBP forecast from Corpay suggests a gradual appreciation of the Euro against the Pound throughout 2025:
Q1 2025: The EUR/GBP rate is approximately 0.8190.
Q2 2025: The EUR/GBP rate is approximately 0.8200.
Q3 2025: The EUR/GBP rate is approximately 0.8220.
Q4 2025: The EUR/GBP rate is approximately 0.8230.
Based on this calculation, the derived GBP/EUR forecast suggests a gradual depreciation of the Pound against the Euro throughout 2025:
Q1 2025: The GBP/EUR rate is approximately 1.2210.
Q2 2025: The GBP/EUR rate is approximately 1.2200.
Q3 2025: The GBP/EUR rate is approximately 1.2170.
Q4 2025: The GBP/EUR rate is approximately 1.2150.
An original version of this article can be viewed at Pound Sterling Live