Goldman Sachs has forecast that the pound will rise to its highest level against the US dollar in more than three years, supported by strong economic growth in the UK and a gradual cut in interest rates by the Bank of England.
The US investment bank predicts that sterling will reach $1.40 in the coming year, a significant jump from the current value of $1.33 and surpassing the previous projection of $1.32.
Goldman also expects the pound to be among the best performing currencies against the US dollar in the coming year, with the euro also rising from $1.11 to $1.15.
According to Goldman, the Bank of England’s “patient” approach to cutting interest rates, as opposed to more aggressive cuts from other central banks, will be a key driver of the pound’s strength. Last week, the Bank chose to maintain interest rates at 5%, while the US Federal Reserve lowered interest rates to a range of 4.75% to 5%. Historically, higher interest rates tend to stimulate demand for a currency by providing better returns on investments such as bonds.
Analysts at Goldman Sachs also noted that Britain’s “solid growth momentum” would fuel sterling’s rise, especially as a robust U.S. economy boosts global demand for riskier assets like the pound. Reduced political volatility under the Labor government is another stabilizing factor as confidence in the currency recovers following the turbulence in the Truss government’s September 2022 mini-budget.
Rachel Reeves, the chancellor, highlighted Labour’s commitment to boosting economic growth in her speech at the party conference. It was the first time in fifteen years that a sitting chancellor spoke at the event. Reeves promised an ambitious budget on Oct. 30 that would reject cuts while prioritizing public investment and working with the private sector to strengthen the economy.
However, she acknowledged the need for tough budget decisions, citing a £22 billion deficit inherited from the previous government that Labor plans to tackle through a combination of tax increases and spending adjustments.