Synopsis:

Barclays remains optimistic on GBP, forecasting a rise in GBP/USD to 1.30 and a decline in EUR/GBP to 0.80 over the coming quarters. The outlook is supported by structural improvements, fiscal expansion, and relative resilience to tariff risks.

Key Points:

• Structural Improvements:

  • Closer EU-UK ties provide long-term support for the UK economy and the pound, underpinning the bullish outlook.

• Fiscal Expansion:

  • The UK government’s announced fiscal stimulus of approximately 1% of GDP bolsters domestic demand and delays the Bank of England's (BoE) rate-cutting cycle.

• Labour Costs vs. Employment:

  • A key uncertainty lies in whether higher labor costs will lead to inflationary pressures or reduce employment, potentially impacting supply-side dynamics.

• Resilience to Tariffs:

  • The UK’s trade deficit in goods with the US suggests lower direct exposure to potential US tariff risks compared to the Eurozone. This creates a positive divergence for GBP relative to EUR.

Conclusion:

Barclays foresees a favorable path for GBP through 2025, supported by fiscal resilience, limited exposure to tariff risks, and structural improvements in EU-UK relations. This positions the pound for gains against both the dollar and the euro, though uncertainties around labor cost dynamics remain a factor to watch.