The short-term rebound of the British Pound Masking Long-term Concerns, Institutions Warn of Increasing Risks

The recent rally of the British Pound (GBP) against the US dollar has hidden underlying structural issues. On December 3, GBP/USD rose by 1.08% to 1.3350, reaching a nearly one-month high, while EUR/GBP also fell by 0.63% to 0.8737, hitting a one-month low. On the surface, this appears to be a bullish signal, but in reality, the market faces multiple challenges.

**Driving Forces Behind the Short-term Rebound**

The recent rise of the Pound is mainly supported by two factors. On one hand, the US November ADP employment data underperformed expectations, and market forecasts suggest that the next Federal Reserve Chair may lean towards a dovish stance, putting downward pressure on the dollar. On the other hand, after the UK government announced the budget plan, market concerns over UK debt eased, allowing the Pound to technically rebound.

Ebury strategists believe, "Eliminating budget uncertainties could provide room for GBP to rebound before the end of the year." This view reflects market optimism about short-term positive factors.

**Central Bank Policies and Growth Expectations**

The OECD's latest report forecasts that the Bank of England will complete two rate cuts before June next year, lowering interest rates from current levels to 3.5%. Notably, the OECD also upgraded its outlook for the UK economy—raising the 2026 growth forecast from 1% in September to 1.2%, and projecting a 1.3% growth rate for 2027.

UK Chancellor Jeremy Hunt welcomed this, claiming that the UK economy will grow faster than market expectations. These positive signals provide short-term support for the Pound.

**Long-term Structural Risks Cannot Be Ignored**

However, several international financial institutions remain cautious about the long-term outlook for GBP. Deutsche Bank pointed out that the UK’s fiscal challenges are far from resolved, with spending potentially increasing significantly over the next two years, followed by the need for austerity measures. The bank believes, "UK budget issues will become a long-term problem, with negative news likely to continue emerging. Without clear solutions, this issue could continue to exert potential pressure on the Pound."

Goldman Sachs’s analysis is even more candid. The bank believes that fiscal constraints will be the main challenge facing GBP, especially relative to other G-10 European currencies. Additionally, increasing risks in the UK labor market could lead to downward pressure on interest rates. Goldman Sachs emphasized, "The combination of fiscal tightening and monetary easing in the UK will negatively impact the Pound, particularly relative to other European currencies."

**Divergence in Institutional Exchange Rate Expectations**

Due to concerns over fundamentals, Goldman Sachs has raised its forecast for EUR/GBP, expecting the euro to appreciate to 0.89 in three months, 0.90 in six months, and further to 0.92 in one year. This indicates that Goldman Sachs anticipates long-term depreciation pressures on GBP.

The future of GBP will depend on the pace of policy adjustments and structural reforms. In the short term, technical rebounds may continue, but in the long run, fiscal issues and the combination of monetary easing policies will continue to pose challenges for the Pound.