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Another major house concedes the pound has outrun its expectations, but holds its targets until the Budget and Bank of England have spoken.
Crédit Agricole says its pound forecasts are under threat from a currency that has outperformed its expectations against both the euro and the dollar this year, and it may raise near-term targets once next week's Budget is out of the way.
Investment bank forecasters have been drifting towards the view Pound Sterling Live set out in the summer, that UK growth would defy the consensus and support the pound, and the French bank's note marks another step in that direction.
"The GBP's resilience vs the USD and its outperformance vs the EUR so far this year has surprised us and reflects the positive impact of several key drivers that, if sustained, could pose risks to our current GBP/USD and EUR/GBP forecasts," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.
The pound-to-euro exchange rate trades at 1.1917, within reach of Wednesday's 17-month high at 1.1938, and the pound-to-dollar rate at 1.3398, its strongest level in a month.
Marinov names three drivers behind the outperformance:
The UK economy has proven more resilient than the bank and the market forecast, with AI investment keeping positive economic surprises flowing.Markets price four Bank of England hikes in the coming months, making the pound one of the most attractive high-yielders in the G10.France's fiscal problems contrast with the "prudence" of the Burnham government, boosting the pound as a safe-haven euro proxy, while the mining-heavy UK stock market has drawn its largest ETF inflows in more than three years.
The first driver is the one we identified in August, when we argued economists were underestimating the UK cycle because of AI investment diffusing out of the US, and the IMF confirmed it last week with an upgrade to 1.3% growth for 2026.
ING, Rabobank, Commonwealth Bank of Australia and Société Générale have each moved towards sterling this month, and Crédit Agricole now acknowledges the same forces.
Why Crédit Agricole Holds Back from Immediate Forecast Upgrades
Marinov is withholding any forecast change until the 28 October Budget and the Bank of England's 5 November decision, because he expects both to disappoint the pound's bulls.
On the Budget, the bank estimates a funding shortfall of around £10bn, covering cost-of-living support, the defence investment plan and Prime Minister Burnham's policy package, to be filled with higher taxes and some extra borrowing.
"The Chancellor may thus delay tackling the UK's long-term fiscal challenges to the March 2027 budget," he says, adding that gilt and pound investors should stay wary of any further rise in state borrowing and of the austerity measures needed to offset it.
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Talk to a specialistThat matches our own expectation that the big fiscal decisions are deferred, with the difference that we see a Budget that passes without incident as the clearing event for the pound's next leg higher.
On the Bank of England, Crédit Agricole expects a November hike that fails to validate the four moves markets have priced.
"We thus expect the BoE to deliver what could be called a 'dovish hike' that could fail to validate the very aggressive rate hike expectations. This could hurt the relative rate appeal of the GBP vs the EUR and USD," says Marinov.
The bank also warns that the correlation between the pound and gilt yields could turn negative again if tighter financial conditions push the Bank towards caution, the pattern that defined sterling's worst episodes of recent years.
The Forecasts
Crédit Agricole already expects the pound to strengthen over the longer term, which is why it sees little need for an upgrade there.
The current targets, with pound-to-euro equivalents:
EUR/GBP 0.86 for December 2026 and March 2027, equivalent to 1.1628EUR/GBP 0.85 for June 2027, equivalent to 1.1765EUR/GBP 0.84 for September and December 2027, equivalent to 1.1905GBP/USD 1.31 for December 2026, rising to 1.39 by December 2027
Measured against spot, the year-end pound-to-euro target sits 2.4% below the current 1.1917, and even the late-2027 target is marginally below where the pair trades today.
The pound-to-dollar year-end target at 1.31 is 2.2% below spot, with the pair only expected to exceed current levels by the second half of 2027.
The bank's own valuation model supports the near-term caution: incorporating Eurozone sovereign credit risk and relative rate spreads, it finds the pound's gains against the euro may have run their course, with EUR/GBP starting to look undervalued at 0.8392, the equivalent of GBP/EUR above 1.19.
Our Tactical View Agrees on the Pullback
Pound Sterling Live's medium-term view is for the pound to end the year higher against both currencies, but the near-term setup points the same way as Crédit Agricole's caution.
The pound-to-euro rate is more overbought than at any point in our records back to 2008, with the Relative Strength Index at 84 against a July peak near 81, and spot sits 1.3% above its 21-day moving average at 1.1776.
Our in-house modelling holds that a gap of this size must close through a pullback or a period of consolidation, and the faded reaction to Wednesday's inflation beat suggests the data-driven leg of the rally is complete.
Above: GBP/EUR at daily intervals with the RSI at a record 84 in the lower panel. Image © Pound Sterling Live, chart created with TradingView.
Consolidation above 1.19 remains the base case into the Budget, but a daily close below that level would open the pullback route to the 21-day average at 1.1776.
The Budget is the trigger that could turn a shallow pullback into something deeper: a package that damages growth without a credible fiscal path would hit a pound carrying stretched positioning, and that is the scenario Crédit Agricole is waiting to rule out before it raises its numbers.
