Goldman Sachs has predicted that the pound will surge to its highest level against the US dollar in over three years, buoyed by strong UK economic growth and a gradual reduction in interest rates by the Bank of England.

The US investment bank forecasts sterling will reach $1.40 within the next year, a significant leap from its current value of $1.33 and surpassing its previous projection of $1.32.

Goldman also anticipates that the pound will be among the top-performing currencies against the US dollar over the coming year, with the euro also rising to $1.15 from $1.11.

According to Goldman, the Bank of England’s “patient” approach to lowering interest rates, in contrast to more aggressive cuts from other central banks, will be a key driver of the pound’s strength. Last week, the Bank chose to maintain interest rates at 5%, while the US Federal Reserve reduced its benchmark rate to a range of 4.75% to 5%. Historically, higher interest rates tend to boost demand for a currency by offering better returns on investments like bonds.

Goldman Sachs analysts also noted that the UK’s “solid growth momentum” would fuel sterling’s rise, especially as a robust US economy increases global demand for riskier assets such as the pound. Reduced political volatility under the Labour government is another stabilising factor, as confidence in the currency rebounds following the turbulence of the Truss administration’s mini-budget in September 2022.

Rachel Reeves, the Chancellor, reinforced Labour’s commitment to driving economic growth in her speech at the party’s conference, marking the first time a sitting chancellor has spoken at the event in 15 years. Reeves pledged an ambitious budget on October 30 that would reject austerity while prioritising public investment and working in tandem with the private sector to bolster the economy.

However, she acknowledged the need for tough fiscal decisions, citing a £22 billion deficit inherited from the previous government, which Labour plans to address through a combination of tax increases and spending adjustments.

Jamie Young

Jamie is a seasoned business journalist and Senior Reporter at Business Matters, bringing over a decade of experience in UK SME business reporting. Jamie holds a degree in Business Administration and regularly participates in industry conferences and workshops to stay at the forefront of emerging trends. When not reporting on the latest business developments, Jamie is passionate about mentoring up-and-coming journalists and entrepreneurs, sharing their wealth of knowledge to inspire the next generation of business leaders.