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RBC Capital Markets expects the pound to remain resilient in the short term, with forecasts showing GBP/USD and GBP/EUR holding firm before edging higher into year-end.
"Sterling is not without challenges, but near-term resilience is underpinned by relative rate support," RBC wrote in its August currency report.
The Pound entered 2025 as the second-best performing G10 currency in the two previous years, and analysts had expected further outperformance over this year.
However, that strength failed to materialise and the consensus forecast for the third and fourth quarters of the year has been lowered.
A run of disappointing economic data that includes rising unemployment and inflation are key culprits behind the GBP's failure to live up to earlier expectations.
But, by RBC's reckoning, disappointing economic growth is now well understood by the market and incorporated into the price of Pound Sterling.
"Markets are prepared for weaker UK activity, which limits the scope for a significant repricing lower in GBP," the report added.
The report argues that resilience seen through August reflects the Bank of England’s more cautious approach to policy easing compared with peers, with money markets now showing investors no longer see another interest rate cut at the Bank of England on the menu for the remainder of the year.
RBC adds that positioning is favourable, with a neutral market position (sell and buy contracts in the options market roughly similar) leaves room for fresh Sterling inflows if global sentiment steadies.
RBC expects the pound to outperform higher beta G10 currencies like AUD and NZD if global growth weakens in line with forecasts.
The bank now forecasts the Pound to Dollar exchange rate at 1.37 by the fourth quarter of 2025, compared with 1.36 currently, reflecting relative monetary policy support.
Against the euro, RBC expects EUR/GBP to ease to 0.85 by the fourth quarter, consistent with sterling retaining relative strength over the coming months.
This translates into a Pound to Euro exchange rate of 1.1765, up from the level of 1.16 at the time of writing. (You can book your target rate with an automatic order).
"We think GBP has relative defensive value within G10, which should allow it to outperform the more cyclical FX bloc," the report said.
Above: After two years of gains, GBP/EUR has entered a period of softer trade.
Longer term, however, the bank remains cautious on sterling’s prospects, citing structural economic weaknesses.
"Near-term resilience does not change our longer-term view that structural imbalances will weigh on GBP," RBC concluded.
The bank also warns that higher energy prices or looser fiscal policy could revive downside risks for the currency.
"Energy costs remain a structural vulnerability for the UK economy and could cap sterling upside if they flare again," RBC wrote.
As of Wednesday, GBP/USD was trading at 1.3602 (+0.05%), EUR/GBP at 0.8574 (-0.02%), and GBP/JPY at 198.95 (+0.08%).