RBC Capital Markets (RBC) does not expect UK fiscal or monetary policy will support the Pound. After a limited Pound to Dollar (GBP/USD) exchange rate decline this year, it forecasts a further retreat to 1.19 at the end of 2025.
RBC notes a relatively dovish May Bank of England (BoE) policy statement, but the bank’s call is that the MPC will wait until August before cutting rates with one further cut this year.
The bank expects that a new Labour government will maintain a tight fiscal policy in 2025 which will hamper growth and lead to further interest rate cuts.
RBC also continues to point to current account deficits and weak UK fundamentals which will maintain Pound vulnerability.
As far as Federal Reserve policy is concerned, RBC now expects that there will only be one rate cut this year and two in 2025.
Yield trends should support the dollar, but RBC notes that the currency has found it difficult to make headway even with solid data releases and the US currency will be vulnerable if there is a run of soft data releases.
The bank notes that market sentiment towards the US election has shifted with investors now considering that a Trump victory in November could be dollar negative.
RBC has a relatively flat dollar profile for 2025 with trade tensions dollar supportive.
Key Quotes:
"Following its strong performance on the crosses in the first quarter, GBP remained one of the best performers in April."
"GBP has fallen towards the bottom of the ranks, as UK 2Y yields have seen the largest decline compared to the rest of G10 MTD."
"On May 9, the BoE signalled that the Bank is getting closer to starting its rate cutting cycle."
"Governor Bailey stated that, 'It’s likely that we will need to cut bank rate over the coming quarters.'"
"Although the June meeting is ‘live’, our economists retain their call for the BoE to start cutting in August and deliver a total of -50bps this year."
"With markets already pricing a full cut by August and a cumulative -58bps by year-end, we have opted to keep our end-Q2 target for EUR/GBP at 0.85."
"Elections are due by 28 Jan 2025 and it remains widely expected that Labour will be the largest party in Parliament."
"We view the risks skewed to the downside for GBP as long as UK’s imbalances continue to require persistent capital inflows."