The British pound could rocket back to levels not seen since before the Brexit vote due to the slow pace of Bank of England rate cuts.
Sterling is set to rally against the US dollar all the way up to $1.50 next year, levels not seen since late 2015, according to Steven Bell, chief economist at Columbia Threadneedle for the EMEA region.
The pound, which on Tuesday was down 0.4% at $1.332, will climb as the BoE cuts interest rates more slowly than the US Federal Reserve and the European Central Bank, Bell suggested.
This follows the half-a-percentage Fed interest rate cut last month, though Fed chief Jerome Powell said yesterday that the central bank will gradually lower interest rates over time, emphasizing that the economy remains strong.
Meanwhile, after a quarter-point cut at the start of August, the BoE's monetary policy committee kept rates on hold last month, with Governor Andrew Bailey also saying cuts would only be made “gradually”.
While there have been concerns raised that tax increases in the Budget later this month could derail the pound’s gains, Bell dismissed this, saying hikes to levies such as capital gains tax are not likely to impact consumer confidence.
Financial markets currently are pricing a BoE cut in November to 4.75%, with around 120 basis points more by next June to bring the base rate to around 3.5%, compared to 165 points of cuts for the Fed and 150 for the ECB.