Many Wall Street banks also foresee further gains for Pound Sterling against the US Dollar and the Euro, continuing its rally that has been among the big trends in currency markets so far in 2024. Such optimism is underpinned by a spate of encouraging macro factors, including the slowing pace of rate cuts by the US Federal Reserve, setting a less aggressive monetary tightening path by the European Central Bank, and rising confidence in the UK economy despite the global slowdown.
One of the key drivers behind the pound’s appreciation has been the tectonic shift in the global interest rate landscape. The more cautious approach to rate cuts from the Federal Reserve has set up an encouraging environment for such currencies as the pound. Normally, every time the Fed becomes more dovish, this helps to soften the dollar and, by that, gives an upward push to such other major currencies as the pound and the euro. Although US inflation is easing, “the Fed is unlikely to slash rates, leaving further upside to Sterling.”
Besides, the policy actions by the European Central Bank also play an important role. In fact, the euro has exhibited some relative weakness of late, as it seems the ECB is going to take a more gradual approach in the manipulation of its interest rates. Certainly, the pound does tend to benefit from this dynamic, at least on a relative basis, given that the Bank of England still assumes a comparably firmer posture as regards monetary policy. The BoE has expressed a number of times a desire to slow its rate hikes, but still remains duty-bound to fight the UK’s high inflation. This is yet another reason investors find the pound more appealing than the euro.
Recent data also suggest that investors have begun to consider the UK as a less fragile investment haven than they had previously perceived. At the beginning of the year, anxieties about the challenges the UK would face after Brexit and its lack of growth in economic activities had weighed on sentiment. However, more recent figures suggest the UK economy has proven rather more resilient, with positive signs in employment and a recovering service sector. The combination of these factors has helped fuel demand for Sterling among investors in particular, while other global economies show signs of a slowdown.
Wall Street banks, such as heavyweights Bank of America and JPMorgan, are bullish over Sterling’s future. In their analysis, with the global economy facing uncertainties, the relative monetary stability of the UK and the sterling valuation set against other major currencies imply there is still some room to go further for Sterling. Many analysts have gone ahead to predict that the pound could go for even higher levels against the dollar, especially if the economic trends hold, and particularly if inflationary pressures in the UK should start to dissipate, thus reducing the need for further aggressive interest rate increases.
There are, however, some risks on the horizon that may restrain Sterling’s further rise. A more dovish pivot by the Bank of England, a sharp deterioration in UK economic fundamentals, including surprise negative consumer spending shocks and trade disruptions, would weigh on the pound. The unexpected hawkish signaling from the Federal Reserve or a stronger-than-expected recovery in the eurozone would also constitute a headwind for Sterling’s rally.
For now, though, there seems to be consensus from top Wall Street financial institutions that the pound has more room to run. Most predict it may end the year stronger against both the dollar and the euro than it is today. Investors will be keeping an eye on central bank policies and economic data in the final stretch of this year, since these would provide indications of key signals for the future trajectory of Sterling’s impressive rally.
