Home » Currency 101 » Where will the pound be by Christmas?

With the global energy crisis, the pandemic, Brexit and more, it could be said that the economy faces a ‘perfect storm’ this quarter. But what does this mean for currency?

For our readers who will be making a significant transaction overseas in the year ahead and who, therefore, could be paying thousands more or less depending on the strength of sterling, we strongly suggest you do not base any financial decision solely on the predictions from major banks.

However, whilst their predictions may only be educated guesswork, they build into a fascinating guide to the political, economic and, these days, health events that will influence the pound and other currencies.

The brand-new Quarterly Forecast is free to download and packed full of analysis and insight from our currency experts here at Smart.

Pound versus euro

According to some analysts, GBP/EUR could fall to around €1.06 in the next three months. Not everyone is quite so pessimistic, though. Predictions stretch as high as €1.20 but settle at an average of €1.16.

At the moment, the pound is taking queues from the Bank of England and anything that may influence BoE decision making. The Bank is due to hold its November monetary policy meeting next week and, due to recent comments from officials, the markets are expecting an interest rate hike. The pound has strengthened due to this and could appreciate further if a hike takes place. However, if messaging from the Bank is more ‘dovish’ or cautious than expected, then sterling could weaken.

As we head into winter, COVID-19 could re-emerge as an influential factor for the pound. Cases are rising and if the government’s winter ‘plan B’ needs to be implemented, then sterling could weaken.

Pound versus dollar

The bank’s predictions show a huge disparity for this pairing over the next 12 months, with forecasts ranging from 1.23 to 1.53!

The dollar is impacted by comments and actions from the Federal Reserve. On the final day before the Fed’s ‘blackout’ period (a period that begins in the lead up to an FOMC meeting, prohibiting officials to speak to the press), Fed Chair, Jerome Powell, said that it is time to start winding down the bond-buying programme. This is due to concerns over rising inflation. However, he added that the Bank would be patient on hiking interest rates.

More will be revealed at the Federal Reserve’s meeting next week. The dollar has weakened slightly in anticipation of this due to worries over slowing economic growth and high inflation.

Euro versus dollar

Predictions also show a large disparity for EUR/USD, ranging between 1.14 and 1.26 over the next three months.

Like in the UK and US, the actions of central banks are also likely to affect the euro over the coming months. The European Central Bank has, so far, taken a more ‘dovish’ stance towards monetary policy compared to the Federal Reserve and Bank of England. This means that it is erring on the side of caution when it comes to tapering monetary policy and have confirmed that interest rates will only be hiked in 2024.

Although officials reportedly have mixed views, the official line taken by the Bank is that high inflation is transitory and, although the economic situation has improved, monetary policy is still needed to support the economy. As ECB official, Andrea Enria, said last week, “caution remains of the essence.”

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