The British pound is positioned to be among the most successful global currencies this year, buoyed by robust economic growth and a significant government transition, according to leading American investment banks.

Analysts at Bank of America project that the pound could reach a four-year high of $1.41 against the US dollar by the end of next year and potentially strengthen to $1.35 by the close of 2024.

This year, the pound has appreciated by 3.5% against the dollar, marking its highest levels since March 2022. Traders are optimistic about interest rate cuts in the United States while anticipating a more measured approach to monetary easing by the Bank of England. Currently, sterling trades at $1.31, having rebounded by 22% from an all-time low of $1.03 that followed Liz Truss’s mini-budget announcement in September 2022.

Goldman Sachs currency analysts noted that the pound’s upward trajectory is expected to persist, attributing this to a favorable interest rate landscape and encouraging economic indicators this year. They also suggested that Labour’s upcoming budget on October 30 could elevate the value of UK assets if the government establishes “fiscal credibility.

The latest surveys from the private sector indicate that the UK’s promising growth momentum is likely to be sustained, according to Goldman. They concluded, “Robust activity data should help allay overly pessimistic sentiments surrounding the UK, ultimately aligning the Bank of England’s outlook with its counterparts, thus supporting the pound’s value.”

As traders anticipate rate reductions by the US Federal Reserve and the European Central Bank this month, expectations hold steady that the Bank of England will maintain its base rate at 5 percent after a reduction in August. Market projections suggest at least three rate cuts in the US and two in the eurozone this year, contrasting with speculation of only one cut in the UK before the end of 2024.

Higher interest rates generally underpin an exchange rate, enabling investors to borrow in a less expensive currency while investing in a more expensive currency, thus benefiting from the differential.

Bank of America indicated that the pound is also likely to appreciate against the euro, recently hitting a two-year peak of €1.18 this month. Goldman Sachs recommended that investors anticipate further gains for the pound against the Swiss franc.

George Buckley, chief European economist at Nomura, remarked that the UK economy is not grappling with the same labor market challenges as the US or the sluggish growth seen in the eurozone. He stated, “The divergence between the UK and its US and European counterparts is evident, as the Bank of England remains untroubled, data shows improvement, and markets project an increasing gap between the Bank and potential Fed and ECB rate cuts through the end of 2025.”