Crédit Agricole Warns Pound Sterling May Weaken Against Euro and Dollar

Analysts at Crédit Agricole are warning that the Pound Sterling (GBP) could weaken against both the Euro and US Dollar due to concerns over UK fiscal policy. The bank's forecast suggests that the GBP/USD exchange rate will decline from its current level of around 1.3334, reaching a low of 1.31 by December.

The Crédit Agricole analysts argue that investors have focused too heavily on the Pound's attractive yield and overlooked the significant fiscal risks embedded in elevated UK government bond yields. They believe that proposed cost-of-living measures and other policy commitments will consume the government's already limited fiscal headroom, potentially leading to a decline in Sterling.

The bank also expects a reduction in expected Bank of England (BoE) tightening, which would be particularly important as the Pound's recent resilience has depended heavily on the UK's yield advantage. Crédit Agricole forecasts that the BoE will leave interest rates unchanged at 3.75%, and while they expect some rate hikes in the future, their own forecasts show Bank Rate remaining at 3.75% through mid-2027 before falling to 3.50% by the end of next year.