Behind the Pound Sterling Appreciation: The Showdown Between Rebound Opportunities and Long-term Challenges

The short-term rebound of the pound has attracted market attention, but this upward movement may just be a "false dawn." On December 3rd, GBP/USD rose by 1.08% to 1.3350, hitting a monthly high, while the euro to pound exchange rate fell by 0.63% to 0.8737. On the surface, the pound's upward momentum appears strong, but deeper risks are hidden beneath.

**What is driving the short-term rebound?**

Two forces are behind this pound appreciation. On one hand, the US November ADP employment data fell short of expectations, coupled with President Trump hinting that Kevin Hassett might become the next Federal Reserve Chair, reigniting market expectations of Fed rate cuts, which weighed on the dollar. On the other hand, after the UK announced its new budget, market concerns over UK debt temporarily eased, giving the pound a breather.

Ebury strategist noted: "The elimination of budget uncertainties could provide room for the pound to rebound before the end of the year." This explains why the pound has shown some short-term strength.

**But long-term risks remain unresolved**

The OECD forecasts that the Bank of England will cut interest rates twice before June next year, bringing the rate down to 3.5%, signaling the end of the rate-cutting cycle. Meanwhile, the OECD has revised upward the UK’s 2026 economic growth forecast to 1.2%, with a 2027 growth estimate of 1.3%. UK Chancellor Rishi Sunak welcomed this, claiming economic growth will surpass expectations.

However, these optimistic voices have not alleviated market concerns. Deutsche Bank warned that the pound is still not out of the woods; spending is expected to increase significantly over the next two years, followed by the need for strict austerity measures. The bank’s analysis states: "UK budget issues will become a long-term challenge, with negative news likely to continue. Without clear solutions, the pound will remain under pressure."

**Goldman Sachs rings the alarm**

Goldman Sachs is even more pessimistic about the long-term outlook for the pound. The bank believes fiscal constraints will be the main challenge facing the pound, especially relative to other G-10 European currencies. Additionally, risks in the UK labor market are increasing, which could exert downward pressure on interest rates.

Goldman Sachs pointed out: "The combination of fiscal tightening and a rate-cutting cycle will negatively impact the pound, particularly relative to other European currencies." Based on this, Goldman Sachs has raised its EUR/GBP forecast—expecting 0.89 in three months, 0.90 in six months, and as high as 0.92 in one year.

**Summary: The pound’s appreciation is merely a short-term blip**

In the short term, the pound’s rise reflects market relief over the resolution of budget uncertainties. However, in the medium to long term, the UK’s debt burden and the rate-cutting cycle will continue to exert downward pressure on the pound. Warnings from Goldman Sachs and Deutsche Bank indicate that this rebound is unlikely to alter the structural challenges facing the pound. Investors should remain cautious of the fragility behind the pound’s appreciation.