Deutsche Bank believes that the pound against the euro will usher in another strong year. However, a major risk is the economic slowdown following the UK Treasury Secretary Reeves' budget.

Deutsche Bank and Goldman Sachs believe that the pound is expected to remain strong next year

Michael Pfister, a foreign exchange analyst at Deutsche Bank, said, "The pound should receive good support in 2025." He expects the pound to steadily rise against the euro (while the euro is steadily falling against the pound); However, the performance of the pound against the US dollar is expected to be relatively flat.

This is mainly because the UK's economic growth and inflation rate are expected to be higher than the eurozone but lower than the United States.

Pfister said, "We expect the pound to remain strong next year. This is supported by the fact that potential inflationary pressures may still be slightly higher than in the eurozone

Prior to this, Goldman Sachs described the pound as an "unprocessed diamond" in its new one-year forecast publication, with a new set of post election forecast targets indicating strong gains in the coming months.

Kamakshya Trivedi, Global Head of Foreign Exchange at Goldman Sachs, said, "We believe that the bullish pattern of the pound should be synchronized with the broader rise of the US dollar

Deutsche Bank stated that the upward trend of the pound against the euro (i.e. the downward trend of the euro against the pound) may continue next year, as "potential inflationary pressures may still be slightly higher than in the eurozone, and growth may also be stronger

The market expects the Bank of England to cut interest rates by 50 basis points in 2025, which means another two cuts of 25 basis points. Most analysts at Deutsche Bank and market attention believe that this situation is unlikely to happen, and the central bank will further cut interest rates, which could pose resistance to the pound.

But Pfister said that the bank should still be more hawkish on interest rate issues than the European Central Bank, which will respond to the slowdown in economic growth in the eurozone by further cutting interest rates.

The potential risk of UK fiscal policy becoming the pound

The Bank of England and the Office for Budget Responsibility have raised their inflation forecasts after the government budget was announced and promised that next year's spending will be significantly higher than previously expected. However, the announced increase in employment tax in the budget is a potential resistance, as if employers absorb tax revenue by offering lower salary increases, it may slow down economic development and put pressure on inflation.

At the same time, they can pass on costs to consumers through higher prices, thereby driving up inflation.

There is significant uncertainty in this matter, which is where the outlook for the pound in 2025 is at risk.

The GBP/USD exchange rate is expected to remain relatively stable, although Deutsche Bank predicts that the GBP/USD exchange rate will rise to 1.32 next year.

Pfister said, "Given the huge growth advantage and the potential inflationary impact of trade policies, we believe that there is not much room for the GBP/USD fundamentals to rise. However, our economists do not expect the Federal Reserve to respond to the return of inflation before the end of 2025. Tightening monetary policy is unlikely to have a positive impact on the US dollar

EUR/GBP daily chart