Pound to Dollar Rate Forecast: GBP/USD to Open at Best 2025 Levels?

February 2, 2025 - Written by Frank Davies

STORY LINK Pound to Dollar Rate Forecast: GBP/USD to Open at Best 2025 Levels?

Foreign exchange analysts at UBS expect that the Pound to Dollar exchange rate (GBP/USD) will dip below 1.20 in the first quarter of this year before a recovery to 1.29 at the end of 2025 as the dollar loses ground.

Goldman Sachs expects a firm Pound tone, but that dollar strength will pin GBPUSD to 1.20 at the end of 2025.

GBP/USD hit 20-day highs above 1.25 during the week before a retreat to below 1.2400 amid trade fears.

Tariffs will certainly be a key short-term focus for the dollar and Pound given the economic and financial-market implications with the threat of high volatility.

On February 1st President Trump announced 25% tariffs on goods from Canada and Mexico with a lower 10% duty on Canadian oil.

Trump used the International Emergency Economic Powers Act (IEEPA) to impose tariffs from February 4th.

Trump also promised that 25% tariffs would also be applied to the EU.

There is still a high degree of uncertainty given the potential for negotiations and legal challenges, but the dollar could post near-term gains.

Trade tariffs will tend to damage risk appetite which will undermine the Pound.

There are also expectations that there will be domestic price increases which will make it more difficult for the Federal Reserve to control inflation.

According to Bank of America (BoA); “Overall it remains an environment that will likely be USD supportive in the near-term.”

The Fed held interest rates at 4.50% at the latest policy meeting which was in line with strong consensus forecasts.

At this stage, markets expect two rate cuts for the year with June the most likely timing for the first move.

Nordea commented; “With the possibility of import tariffs and a reduction of immigrant workers lifting inflation, the Fed will probably not feel confident that inflation risks have abated just from a couple of lower CPI prints. We therefore see it unlikely that the Fed will cut rates before the summer, and most likely they will not cut at all in the foreseeable future.”

BoA is not convinced dollar strength will be sustained; “Further out, we still see some downside US growth risks due to rising trade tensions and tighter immigration policies. While the Fed has shifted its tone, any notable turn lower in the labor market, or significant renewed progress in terms of moving inflation pressures lower, will likely spark renewed calls for more rate cuts than currently priced.”

Goldman expects a strong dollar, but did note some risks; “That said, the moves this week are a reminder that a key risk to our view is a repeat of 2017-style policy outcomes, when actual trade policy was largely unchanged—despite a lot of sound and fury—and the Dollar more than reversed its post-election gains.”

The Nasdaq index posted sharp losses after Chinese company DeepSeek claimed that it had created an AI application at a much lower cost than those developed by the US tech sector.

In response, there were heavy losses in the tech sector, but confidence returned later in the week.

Nomura commented; “If the US equity sell-off remains intense and continues in the coming weeks (e.g., Nasdaq is down ~20% or more from the peak), this could lead to a weaker USD.”

There are strong expectations of a Bank of England (BoE) interest rate cut to 4.50% from 4.75% while the medium-term outlook will be very important for the Pound.

According to ING; “Fiscal consolidation in March and a drop in services inflation through the second quarter should lead to a 100bp BoE easing cycle this year. This compares to just 68bp of easing priced by the market today. We see no reason to change our end-year GBP/USD forecast of 1.19/20.”

MUFG expects a dovish BoE stance; “We expect the communications and forecasts next week from the BoE to signal the scope for the MPC being more active in cutting rates this year.”

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TAGS: Currency Predictions Pound Dollar Forecasts