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The pound can still take a leading role in driving fresh weakness in the U.S. dollar over the coming year, according to Standard Chartered's latest Global Market Outlook.
Economists at the UK-based bank argue that sterling and the Japanese yen are both undervalued against the dollar and will increasingly displace the euro as the principal drivers of dollar losses.
"Over a 6–12 month horizon, we expect gains in the JPY and GBP to lead the next move lower in the USD, as the two currencies take over the baton from the EUR," the report said.
The bank acknowledged that the dollar has been recovering modestly since mid-year, supported by a short squeeze as bearish positioning unwinds.
However, it does not expect the dollar to break sustainably above the 100 threshold. “Any short-term USD rebound offers an opportunity to add to weak USD trades,” the report said.
The outlook for sterling is linked closely to Bank of England policy. While weakening labour market data has encouraged speculation about aggressive rate cuts, Standard Chartered believes such expectations risk being overdone.
The report noted that inflation pressures remain a constraint, stating that the "magnitude of rate cuts may disappoint markets and result in more support for the GBP relative to the EUR in the near term."
The broader context for currency markets is being shaped by the Federal Reserve; a sharp slowdown in U.S. jobs growth has revived expectations that the Fed will restart rate cuts next week.
Standard Chartered says the move is justified as rates remain well above the central bank’s estimate of neutral. Lower borrowing costs, it suggests, are essential to sustaining an economic soft landing.
Nonetheless, the Fed faces a delicate balance: recent increases in tariffs have lifted near-term inflation risks, complicating the policy outlook.
The report cautioned that a spike in price pressures could make it more difficult for the Fed to cut rates in September, while any delay might provoke a renewed dollar sell-off and push long-term bond yields higher.
Against this backdrop, Standard Chartered’s call for sterling strength rests on undervaluation, relative resilience in the UK policy mix, and the likelihood that U.S. easing will outweigh European policy shifts. The yen is expected to join the pound in leading the next phase of dollar weakness once Japan moves closer to policy normalisation.
At present levels, the pound trades around $1.33, while the dollar index sits just under 100. Standard Chartered’s analysis suggests that both could look very different a year from now, with sterling advancing and the dollar on the retreat.
Standard Chartered forecasts GBP/USD at 1.35 in three months and 1.37 in twelve months, marking a steady climb from current levels. It also projects the dollar index (DXY) to fall to 96 over the same period, compared with around 99.5 in the near term.