Sterling is set to make further gains, even after a blistering recent run, thanks to a buoyant UK economy and the BOE’s caution on cutting interest rates, say investment banks.
BofA and Barclays expect the pound to rise to 1.35 by the end of the year. Goldman Sachs has a price target of 1.40 over the next 12 months. Sterling has been the best performing G10 currency this year, gaining over 5% against the dollar. It has rallied strongly since late April, when it briefly dropped below 1.23.
The gains have been fuelled by expectations that UK interest rates will remain higher than in other countries, owing to stubborn inflation in services and an economy that has been surprisingly resilient.
While the Fed delivered half a percentage point of cuts so far this year, the BoE has only lowered rates by a quarter-point in August, with just less rate reductions expected over the next six months.
UK private sector activity grew more than expected in August to its fastest pace in four months, while the OECD forecast the UK would have one of the fastest growing of the world’s biggest economies this year and next.
However, some investors think sterling could soon run out of steam. Michael Metcalfe, head of macro strategy at State Street, said asset managers in aggregate were "neutral" on sterling.
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