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Pound sterling retains the support of elevated interest rates.
Next week's Bank of England should reinforce the attractiveness of the UK's superior interest rate offer to foreign investors, while the dollar will resume its downtrend into year-end as the Federal Reserve lowers U.S. rates.
This is the assessment of a number of leading foreign exchange analysts we follow, as they look forward to next week's interest rate decisions at the Bank of England and Federal Reserve, which should initiate a new phase of policy divergence.
The Bank of England will keep interest rates unchanged, while offering little to suggest it will cut rates again before year-end on account of the UK's stubborn, and rising, inflation.
Expectations for the Bank to maintain its base rate at current levels is underpinning short-term UK interest rates, which are attractive to foreign investors searching for yield.
"The BoE's hawkish pivot in August has certainly played a big role here – preserving sterling as one of the few currencies still paying 4% per annum in one-week deposits," says ING Bank in a Bank of England preview note.
Looking ahead, ING thinks a bearish dollar story story is to dominate from October onwards, allowing GBP/USD to end the year towards the top of the 1.32-38 range.
"We're cognisant of the big event risk around the 26 November UK budget, but expect the cleaner dollar bear trend to be the dominant factor at this point," say analysts.
This week's U.S. inflation print has meanwhile verified expectations for a series of interest rate reductions in the U.S., that would weigh on the U.S. short-term interest rates and the dollar.
"Bigger picture, we stay bearish USD, expecting it to resume its downward trend over the rest of 2025," says Bank of America in its latest weekly FX analysis.
"While Fed rate cuts are well priced in, the risk of lower real rates and higher inflation breakevens is likely not," it adds. "A dovish policy pivot amid sticky inflation and Fed independence concerns could be amplified by the recovery in China sentiment and renewed USD hedging activity."
U.S. inflation met expectations at 2.9% year-on-year, while core inflation also met estimates, suggesting little unwarranted concern on the inflation outlook.
The Fed will therefore see a window of opportunity to address a slowing economy and deteriorating labour market by lowering interest rates.
Analysts at Westpac say that in order to stoke GDP growth back to or above trend, "substantial easing will be required."
The market is ready for the resumption of rate cuts, seeing a further 150bps of rate cuts priced in by January 2027, a move that would take the Fed funds rate back to a 'neutral' 3.00%.
"Against around 50bps of easing in Australia, Canada and the UK (all market expectations) and with the ECB’s easing cycle almost done, pricing for the policy rate outlook is firmly against the US dollar," points out Westpac.
Above: The Dollar index has snapped a downtrend. The consensus amongst analysts that a recent period of consolidation will resolve to the downside.
Westpac looks for the U.S. dollar DXY index to slowly retreat to roughly half way between its 10-year and 20-year averages, respectively 98.5 and 90.3, with a low of around 93.5 forecast for the second half of 2027.
This implies an ongoing rise in the main exchange rates: "underlying this trend decline are steady gains for EUR/USD, from USD1.17 today to $1.20 end-2026 and $1.21 end-2027, and for GBP/USD, from $1.36 currently to $1.38 end-2027," says Westpac.