Pound to Dollar Rate Predictions Next Year: Waves of Uncertainties Surround 2025

December 31, 2024 - Written by Tim Boyer

STORY LINK Pound to Dollar Rate Predictions Next Year: Waves of Uncertainties Surround 2025

NYE 2025 Forecast Update: The Pound to Dollar exchange rate (GBP/USD) dipped to 6-month lows below 1.2500 during December before settling just above this level.

UBS expects that GBP/USD will strengthen to 1.34 by the end of 2025 as the dollar eventually loses ground.

In contrast, HSBC maintains a bullish dollar stance and is unconvinced over the Pound with an end-2025 GBP/USD forecast of 1.23.

After initial losses, MUFG expects a GBP/USD recovery to 1.3000 at year-end.

UK, US and global developments will all be crucial for the Pound during 2025 with the potential for a high degree of uncertainty and choppy trading.

ING commented; “To mash up a popular phrase of a former US Treasury Secretary, it looks like the incoming Trump Administration might as well say to the rest of the world: ‘Our policies, your problem’. As such, the world waits on January’s arrival of Donald Trump and the avowed intention to grow the US economy at the expense of trading partners.”

According to Nordea; “there is also the risk that the global economy could fall into a downturn next year, which is an environment that tends to favour US treasury bonds and other capital flows that will benefit the dollar.”

It also noted a possible positive dynamic; “Looking ahead, the largest risk for the safe-haven dollar may be that global economic growth stays solid and that economies outside the US rebound and close the economic gap between the US and the rest of the world.”

HSBC expects the overall cocktail will be positive for the US currency; “In 2025, other factors are also likely to play a part, including any developments in US trade policy, US deregulation, relative fiscal policy, and geopolitics. In the end, it may still come down to the data, but drivers may become more varied, and we expect the USD to remain on top.”

Monetary policy will be a key element for the Pound during the year.

The Bank of England (BoE) cut interest rates at the August and November 2024 meetings.

Rates were held at 4.75% in December, although there was a 6-3 vote with the three members backing a further cut.

There has been evidence of sticky wages growth and core inflation remains significantly above target.

Growth has, however, been notably subdued and the data suggests that the economy is liable to have contracted over the second half of 2024.

The BoE will, therefore, face a tough challenge in 2025.

MUFG commented; “We still expect the BoE to stick the current quarterly pace of rate cuts and deliver another rate cut in February.”

The bank added; “Building expectations for a widening policy divergence between the BoE and Fed will encourage a weaker cable heading into early 2025.”

ING expects different timing for GBP/USD losses; “We think that softer UK services data will not emerge until February, suggesting GBP/USD may hold onto gains until then. But ING’s house view is for quite aggressive BoE rate cuts in 2025 – taking the policy rate 150bp lower to 3.25%. Hence our view for some modest GBP/USD downside later next year.”

Ruth Gregory, deputy chief UK economist at Capital Economics commented; “All things considered we haven’t changed our view that the Bank will continue to cut rates by 25 basis points a quarter until rates get to 3.5 per cent and that the Bank will cut rates further and faster than the Fed but by less than the ECB.”

Barclays also expects rate cuts to 3.5%.

According to UBS; “the UK budget and high UK inflation should limit rate cuts by the BoE. But even here, market pricing for just two cuts looks quite conservative.”

Fiscal policy will also be important through the impact on the economy, confidence in the outlook and the implications for interest rates.

The government raised taxes sharply in the October budget, in part to fund a strong increase in spending for the next year.

Barclays expects further tightening which could undermine growth; “the most likely outcome, in our view, a pencilling in of further spending restraint beyond the horizon of June's spending review.”

HSBC expects a negative Pound impact; “While it may temper the pace of monetary easing by the Bank of England, the Budget has not fostered big upward revisions to market expectations for UK growth. From a currency perspective, this is the wrong kind of fiscally induced monetary hawkishness – one generated by higher cost expectations rather than one driven by higher growth expectations.”

Danske, in contrast, is positive on the UK outlook; “With underlying domestic demand holding up and a boost from the expansionary fiscal stance, we expect a rebound in growth in 2025.”

Goldman Sachs expects that there will be a positive medium-term impact on the economy; “We think the Autumn budget will have a more lasting impact on the medium-term growth trajectory, and it will likely still take several months before the markets can start to gauge that effect more precisely.”

US economic policies will have a crucial impact on the Pound outlook.

The Federal Reserve cut interest rates by 25 basis points in December, but there was significantly more hawkish rhetoric with the median projections from committee members suggesting that only two cuts are likely in 2025.

According to ING; “We got another 25bp policy rate cut from the Fed, but updated projections and Chair Powell’s press conference confirms that the Fed is going to be much more cautious next year with sticky inflation and President Trump’s policy mix meaning a higher hurdle is required to justify rate cuts in 2025.”

Nordea added; “Over the last months there are signs that US inflation could level out at an uncomfortably high level. We therefore see March 2025 as the last cut in this cycle and there is also a risk that the Fed will not even cut next year at all.”

Nordea added; “Of course, the Fed could also end up cutting its policy rate more than we expect, which would end up hurting the dollar, but we see a greater risk of stronger economy instead of a weaker economy.”

UBS notes the risk that market expectations will be incorrect; “the two cuts the market is pricing for 2025 may prove too few. Over the last two years, we have seen repeated swings in Fed expectations from pricing bigger growth downturns to higher interest rates for longer. The reality is likely to be in between.”

Trade policies will also be a key element given Trump’s threat to impose tariffs or use them as a negotiating weapon.

A tough US trade policy would potentially have a direct impact on the Pound with some hopes that the UK would be insulated.

RBC commented; “If the potential tariffs are focused on goods imports, then the UK should be more insulated due to services making up around two-thirds of its exports to the US.”

Global implications would also have important implications for risk conditions.

RBC still noted potential Pound vulnerabilities; “The hurdle is low for GBP weakness if there are any concerns about UK’s growth outlook or fiscal dynamics, and/or there is a risk-off shock.”

RBC forecasts GBP/USD at 1.24 at the end of 2024.

Goldman is more positive; “the Pound’s procyclical characteristics and its lower vulnerability to tariff risks and trade uncertainty should both support the currency over time, and these serve as the key underpinnings to our continued constructive view on the Pound.”

It has a 12-month forecast of 1.30.

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