End-2025 Pound Sterling Forecast Cut Sharply Vs Dollar At RBC

Previously, RBC Capital Markets had forecast that the Pound to Dollar exchange rate (GBP/USD) would end 2025 at 1.26.

With underlying concerns over UK fundamentals and a stronger dollar profile, the forecast has now been cut to 1.19. The end-2024 forecast is 1.24.

RBC looks at the medium-term UK fundamentals and still considers that the Pound is vulnerable with pressure for interest rate cuts.

Looking at 2025, the bank looks at the potential stresses on fiscal policy.

In its March budget the current government claimed that it would meet its medium-term fiscal rules on budgets deficits and debt, but this has only been achieved by projecting a very tight squeeze on spending from 2025 onwards.

If these plans are maintained there will be a sharp negative contribution to the economy from fiscal policy.

There will be an election by early 2025 and RBC notes that an incoming Labour government would look to ease policy, but it expects scope for manoeuvre without triggering a slide in market confidence is likely to be limited.

RBC also expects that the Federal Reserve will be cautious in cutting rates and the dollar is likely to remain a high-yielding currency over the medium term.

In this context, its 2025 dollar forecasts have been revised higher.

Sending large amounts of money abroad? Did you know you could save compared to using the high street banks? Get a free guide and start a chat with our team of foreign exchange experts.

The end-2025 GBP/EUR exchange rate forecast has, however, been adjusted to 1.10 from 1.07.

Key Quotes:

“The BoE’s March meeting had a clear dovish tilt, with both hawkish dissenters throwing in the towel (8-1 vote).”

“Sonia responded accordingly with markets now priced for more than a 50/50 chance of a cut by May.”

“Perhaps GBP’s resilience reflects the fact that even with the forward curve pricing in 72bps of cuts by year end, the pace is similar to the Fed (-71 as we go to press) and less than the ECB (-89bps).”

“Technically, GBP/USD has been trapped in a sideways trading range between 1.2500 and 1.2900 since December.”

“The factors that would cause material GBP upside, such as single market or customs union membership, do not appear to be in play for the UK on any kind of investable horizon.”

“We have flattened out our EUR/GBP profile for 2025, in line with our flatter profile for EUR/USD but retain the view that the risks to GBP are skewed to the downside as long as the UK’s imbalances still require persistent capital inflows.”