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According to a new economic research update from Wells Fargo, the Bank of England will cut interest rates ahead of the U.S. Federal Reserve in a move that should propel the Pound to Dollar exchange rate firmly below 1.20.

Underpinning this prediction is a decision by economists to revise higher their growth outlook for the U.S. and China while maintaining that outlooks for the Eurozone, U.K. and Canada are underwhelming.

"We continue to believe the U.K. will enter a recession in the near future," says Nick Bennenbroek, Economist at Wells Fargo.

Wells Fargo is a prominent U.S. Main Street lender with a significant international commercial and investment banking presence based in the UK. Its researchers note that G10 central banks - particularly the U.S. Federal Reserve - are adopting "higher for longer" stances on monetary policy.

"But the Bank of England and Bank of Canada should be the first institutions to ease as growth weakens and inflation slows," says Bennenbroek.

Foreign exchange markets are currently highly focussed on interest rate cuts in 2024 as economic growth is expected to fall and bring inflation in various developed economies close to the ~2% level that most central banks target.

Those with the weakest growth profile are anticipated to cut more pronouncedly. The rule of thumb is that this will see their currencies fall relative to those holding rates and cutting slower.

The market is currently factoring in a first UK rate cut by September 2024, but if Wells Fargo is correct, this cut could come far sooner.

The view is, therefore, consistent with a softer Pound. "In a backdrop of dollar strength combined with grim local economic outlooks, we expect the euro and pound to underperform," says Bennenbroek.

At the same time, U.S. economic outperformance could see the market push back the timing of U.S. rate cuts.

"We continue to believe the U.S. dollar can broadly strengthen into early 2024. Economic resiliency from the U.S. and a Fed that is unlikely to ease before the middle of next year should keep the greenback on the front foot for the next few quarters," says Bennenbroek.

But the Pound-Dollar exchange rate will find a nadir when the cycle in the U.S. turns and the Fed begins to cut rates.

"As the Fed begins cutting rates, and eases more than markets are priced for, the dollar should weaken over the second half of next year," says Bennenbroek.

"Longer term, we maintain our view that the U.S. dollar can broadly depreciate against G10 and emerging market currencies. This view stems from our belief that the U.S. economy will enter recession and the Fed will respond by cutting interest rates more aggressively than markets are priced for," he adds.

Wells Fargo forecasts the Pound to Dollar exchange rate at 1.19 by the end of 2023 and 1.17 by the end of the first quarter of 2024. A low of 1.16 is predicted for the middle part of 2024 ahead of a recovery to 1.21 by the end of the first quarter of 2025.