Published: February 19th, 2025
Analysts at Barclays say this week’s rapid rebound in the GBP/USD exchange rate is more than a flash in the pan, and could well translate into further gains.
In a research briefing published Monday, the bank’s Forex Strategy Unit wrote that ‘despite how quickly the recent move happened, we see a number of factors that are supportive of an extended rally for the Pound.’
The call comes on the heels of a four per cent recovery in Sterling's value against the Greenback since late January, which pushed GBP/USD up from a low of 1.2203 to 1.25.
Forex traders are now weighing potential outcomes from aggressive tariff plans coming out of the Trump White House, which could reduce any significant tail risk of a sudden USD strengthening.
Trump seems determined to use high tariffs as bargaining chip in broader trade and policy negotiations with individual countries and applying them on a case say case basis, meaning a single universal tariff, which Barclays says would be the most pro-USD option, much less likely.
Signals are also appearing that suggest US economic growth is cooling. If the run of upbeat data prints seen in the final quarters of 2024 is over, traders may be start making bets on Federal Reserve interest rate cuts again.
Barclays analysts noted however that market re-positioning isn't likely to negate further GBP/USD gains, for now at least.
‘Traders squeezed out most net long positions at the end of last year, leaving the market net short.’
In late January, currency strategists at Morgan Stanley said GBP/USD had become a buy, noting that market positioning at that time pointed to a rebound. Barclays says its forecasts also support a buy call.
In November 2024 year-ahead forecast, analysts at Goldman Sachs said the British Pound could be potential ‘hidden gem’. The Wall Street bank’s report listed a set of post-election targets pointing to solid gains for Sterling in the early months of 2025
Noting what it called GBP’s ‘bullish set-up,’ Goldman says the Pound ‘should keep pace with a broader appreciation in the Dollar.’ Given Goldman Sachs’ central position in the global financial architecture, the bank’s outlook could affect
how traders set their expectations of the forex market in the coming months and prepare rational trading strategies for what could be a volatile 12 months. One prediction was for the Pound to Euro exchange rate to rise well above 1.20. 'We have maintained a constructive view of GBP over much of 2024, and we believe the rationale is still there for ongoing outperformance by Sterling on G10 crosses over the next few months.’
Goldman’s report landed in the aftermath of Donald Trump's US presidential election victory, which also saw his Republican Party win majorities in both houses of Congress.
Trump 2.0 has been on the policy warpath, shaking up global trade while seeking to strengthen America’s fiscal footing, a scenario which would keep US interest rates ‘higher for longer’ than other major currencies.
US import tariffs now threaten to hit the Eurozone's biggest exports, while higher Fed rates would ultimately mean gains for the Greenback.
‘We see that as a powerful supportive mix for the Dollar,’ Goldman’s report adds. ‘As a result, we are no longer looking for broad depreciation by USD, even on a six or twelve-month timescale. We see USD staying stronger for longer.’
In August 2024, the Pound faced down an extended selloff against a backdrop of sinking global stock markets and worries that the US economy was faltering.
The Pound to Euro rate dropped 0.60 per cent on 21st August after the Bank of England (BoE) cut interest rates by 25 basis points. US equities markets fell the day after as earnings from big technology companies came in well below expectation.
A research note from Capital Economics said those factors created additional selling pressures in the Asian session, when Japan’s Nikkei 225 index fell by more than over five per cent. ‘In our view, such a steep and sudden decline points to a wider bout of global risk aversion.’
Risk-averse sentiment can negatively impact Sterling, which was already feeling the pressure after the Bank of England made its rate cut. The Pound to Euro conversion fell below 1.18 on Tuesday 6th August to touch 1.1773, a level last seen in early July.
Historically, GBP tends to lose value against USD, EUR, CHF and Yen when market sentiment turns gloomy. It can also gain against 'high beta' currencies like the Norwegian Krone and the Australian and New Zealand dollars.
‘Stock markets fell globally as fear trading took over in advance of the crucial US job print,’ wrote Capital Economics’ analysts. ‘Many sectors are experiencing a selloff, with tech firms suffering worst after investors punished Intel, Amazon, Apple and others for poor earnings.’
In April, The GBP/EUR exchange rate moved to the 1.17 threshold following publication of GDP figures showing Britain’s economy grew 0.1 per cent month-on-month in February 2024, while an upward revision to January's figure (from 0.2. per cent to 0.3 per cent) added to the good news.
The combined numbers from the Office of National Statistics (ONS) effectively guarantee that the quarterly figure will indicate a return to growth, ending the low-level recession seen in the second half of 2023. A Q1 contraction would mean that UK GDP declined by a full percentage point in March, something economists see as highly unlikely.
Sterling was up against most of its peers at mid-month, though the Pound to Dollar rate struggled to get beyond 1.2537 thanks to a broader Greenback rally driven by the release of strong US inflation and labor market prints.
Production output drove the majority of UK growth in February, expanding by 1.1 per cent. The UK’s large services sector grew by 0.1 per cent in February and by 0.3 per cent in January. Analysts said any upside potential from the GDP figures could be hemmed in by the relatively small advance in the figures, which aren’t big enough to significantly stimulate inflation.
