The pound is forecast to rise sharply against the dollar after one of the City's most gloomy analysts admitted it was “wrong” to underestimate Britain's economic prospects.
Citi has torn up a previous prediction that the pound would drop to parity with the dollar in the wake of the mini-Budget and now predicts sterling could rise towards $1.30 at the start of next year.
Sterling is currently trading close to a one-year high against the dollar at $1.26 after a boost from strengthening economic activity and a more resilient housing market.
Vasileios Gkionakis, head of European foreign exchange strategy at Citi, said that its predictions of a “material correction” in house prices and a collapse in consumption had not come to pass.
In a note to clients on Tuesday, he said: “We have been wrong, plain, and simple.
“The reality is that, while inflation exhibits some idiosyncratic persistence, contrary to what we expected, activity has proven far more resilient.”
This view was echoed by analysts at Natwest, while Goldman Sachs said earlier this month that it had adopted an “outright constructive stance” on sterling in what it described as a“new era” for the currency as the Bank of England is expected to keep raising interest rates to keep a lid on inflation.
Kamakshya Trivedi, head of global foreign exchange at Goldman, said: “Essentially, we think that the same factors that acted as headwinds on sterling in 2022—mostly natural gas prices and the relative stance of Bank of England policy—have turned to tailwinds.
“The UK’s terms of trade have rebounded since August and, in turn, the magnitude of the likely real income squeeze has diminished meaningfully. At the same time, the housing market is showing tentative signs of stabilising.”
Bank policymakers are expected to raise interest rates for the twelfth consecutive time to 4.5pc on Thursday.