Goldman Sachs predicted that the pound will reach its highest level against the US Dollar since 2021, thanks to the UK’s growing economy and the Bank of England lowering interest rate gradually.
The US investment bank predicted that the pound would reach $1.40 within a year, up from $1.32 in its previous forecast and $1.33 at its current level.
Goldman predicted that the euro would rise to $1.15 over the same time period, from $1.11.
Since the beginning of the year, the investment bank has repeatedly raised its forecasts and argued in favor of the pound.
Goldman said that a “patient” reduction in interest rates by Bank of England will likely strengthen the pound compared to other central banks. The Bank of England’s Monetary Policy Committee decided to keep borrowing costs at 5% last week. Meanwhile, the US Federal Reserve reduced its main interest rates by 50 basis points, to a range of 4,75 to 5%.
A currency’s value increases when interest rates are higher. This is because fixed income assets such as bonds denominated with that currency tend to yield more.
Goldman analysts said that “solid growth momentum” will also be driving the pound’s rise. They added that a strong US economy may increase demand for riskier investments such as sterling.
The Labour government’s less volatile tax and spending decisions could also stabilize the pound. It hit a new record low in relation to the US dollar after Liz Truss released her mini-budget for September 2022.
Rachel Reeves, the first sitting Labour Party chancellor in 15 years to address a Labour Party Conference, said the government will not allow a return of austerity. She insisted on her first budget, which will be presented on 30 October, being one with “real ambition”.
Reeves stated that an “active government”, working in partnership with private sector, is needed to revitalize investment and support public service.
The Labour Party has given a high priority to boosting the GDP, as growth has slowed dramatically since 2008’s financial crisis. Theoretically, increased growth would boost the pound’s value against other currencies, as the UK becomes a more attractive investment destination.
The chancellor stated that she “would not duck” difficult decisions to stabilize the public finances. Labour says it inherited from the Conservatives a fiscal deficit of £22 billion that will require a combination tax increases and budget cuts to eliminate.
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