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The British Pound is confirmed as 2024's second-best performing G10 currency, and at the turn of the year, analysts are anticipating further outperformance.
In 2024, GBP exhibited notable strength against major currencies, influenced by several key factors, the most prominent being the Bank of England's decision to maintain higher interest rates compared to other central banks.
The Pound was only second to the U.S. Dollar in the performance stakes, but only just, as the Pound to Dollar exchange rate lost 0.70% of its value over the year.
The Dollar's outperformance was also driven by relative interest rates, with the Federal Reserve holding a higher base rate than most developed peers, and expectations that they will fall only marginally in 2025.
Sterling's biggest gain came against the New Zealand Dollar (+10.6%), which was held back by disappointing Chinese economic news, a domestic economic recession and the Reserve Bank of New Zealand's response that involves an aggressive interest rate cutting cycle.
Despite a deterioration in German and French political stability, the Euro still managed to resist GBP strength better than most other G10 currencies, with the Pound to Euro exchange rate managing an annual gain of 4.80%.
The UK's political environment has stabilised over recent years, and the Labour Party's strong majority in parliament, secured in the July election, can underpin political steadiness.
International investors meanwhile increased their holdings in UK government bonds, perceiving the UK as a safe haven amid global economic uncertainties. This influx of investment supported the pound's value.
The UK's economic performance outpaced that of the Eurozone, particularly countries like Germany and France, which faced economic challenges. This divergence made the pound more attractive relative to the euro, leading to its appreciation.
Looking ahead, analysts see the potential for further outperformance by the Pound against most currencies.
Goldman Sachs describes the British Pound as a "diamond in the rough," reflecting confidence in the UK’s economic resilience. The firm projects that the GBP/EUR exchange rate could surpass the 1.20 mark by 2025, positioning Sterling for significant gains.
Analysts at NatWest expect a steady upward trajectory for GBP/EUR, forecasting the pair to conclude 2025 at around 1.22. This implies a Euro to Pound exchange rate of 0.82, signalling a robust outlook for the Sterling.
Commerzbank’s projections for the GBP/EUR rate suggest moderate growth, with the pair reaching 1.19 by the end of December 2024 and climbing to 1.20 by March, June, and September 2025. This outlook underscores confidence in a stable Pound appreciation.
However, it will once again be the U.S. Dollar that threatens to outperform Sterling in the coming year.
Goldman Sachs anticipates ongoing strength in the U.S. Dollar throughout 2025, suggesting that "we are still living in a Dollar world." However, they also describe the British Pound as a "diamond in the rough," implying that while the Dollar may dominate, the Pound could exhibit relative resilience.
Bank of America Merrill Lynch remains among the more bullish on GBP/USD, projecting the exchange rate to reach 1.35 by the end of 2024. Analysts attribute this outlook to the expectation of a slow pace of interest rate cuts by the Bank of England, which could support the Pound.