The British pound faces a turbulent outlook in 2025, shaped by conflicting domestic and international forces:

After a distinct loss of economic momentum in 2024, labour markets are softening, putting wage gains under pressure and driving inflation expectations lower. We think the Bank of England will cut rates more aggressively than markets anticipate in the near term, limiting the extent to which interest differentials can support the currency against the euro. 

A period of outperformance has not been sustained.
Contribution to monthly change in GDP, 3-month moving average, %
January 2022 – September 2024

But the UK’s services-focused industrial structure offers some insulation against a turn toward trade protectionism in the US, especially when compared to more goods-dependent countries across the Channel. The Labour government’s expansionary fiscal policy, unveiled in its first budget, is likely to provide a strengthening tailwind to growth as the year progresses. And with the Bank Rate projected to fall well below 4%, consumers should experience a substantial improvement in real disposable incomes, adding to an already resilient demand backdrop.

The economy is more services-oriented than its peers.
Share of services in total exports, %
2000 – 2023

We think the pound could suffer along with its global counterparts if the greenback adds to its recent gains in the first quarter, but expect that a recovery will begin once markets have more soberly evaluated the likely direction of US policy. A push back above the 1.30 threshold against the dollar looks possible by year end.