The GBP/USD exchange rate recently dipped to six-month lows, falling below the 1.2500 mark before staging a modest recovery. Analysts at Danske Bank have provided a detailed forecast, projecting a gradual GBP/USD increase in early 2025, followed by a retreat to 1.22 over the next 12 months. This outlook is driven by expectations of a stronger US dollar and evolving market conditions.
Danske Bank’s 12-Month GBP/USD Prediction
Danske Bank anticipates a slight uptick in the GBP/USD exchange rate during the first quarter of 2025. However, the bank’s 12-month outlook suggests a decline to 1.22, driven by a strengthening US dollar amid robust economic policies and favorable growth dynamics in the United States.
Key Factors Influencing the US Dollar’s Strength
Pro-Growth and Inflationary Policies: Danske Bank highlights the likelihood of pro-growth measures in the US, which could fuel inflation and economic expansion.
Higher Real US Interest Rates: A potential “red sweep” in US policy may contribute to higher real interest rates, further bolstering the dollar.
Federal Reserve Adjustments: Despite forecasting four 25-basis-point rate cuts during 2025, Danske Bank believes these adjustments will not significantly weaken the dollar, especially if US growth remains strong.
Risk of Market Positioning Correction: While the dollar remains resilient, the bank acknowledges the potential for a short-term correction if downside risks to the US economy materialize.
Bank of England’s Role in GBP/USD Dynamics
On the UK side, Danske Bank projects that the Bank of England (BoE) will implement quarterly interest rate cuts throughout 2025, bringing rates down to 3.75% by year-end. This approach suggests that GBP-USD yield differentials will remain relatively stable, providing limited support for the pound against the dollar.
Elevated Risk Profile in 2025
Danske Bank notes an elevated risk profile for 2025, emphasizing that unforeseen economic developments could impact their forecasts. Should the US economy experience unexpected challenges, the dollar could face temporary weakness, altering the projected GBP/USD trajectory.
Conclusion
Danske Bank’s forecast underscores the dominance of the US dollar in 2025, with the GBP/USD exchange rate expected to settle at 1.22 over the next 12 months. Key drivers include strong US growth dynamics, potential policy changes, and the BoE’s anticipated rate cuts. Investors should remain vigilant of evolving economic conditions that could influence currency markets and adjust strategies accordingly.
