Sterling looks set to restart its rally against the Euro and Dollar over the next few months, according to Bank of America Merrill Lynch.

Indeed, economists at the Wall Street bank forecast the Bank of England (BoE) will keep interest rates at their current levels, or perhaps higher, for a prolonged period of time.

Meanwhile, US and eurozone central banks will start to reduce rates by as soon as the middle of next year, leading to divergent monetary policy conditions that may result in Euro and Dollar downside, Pound Sterling Live reports.

Currency markets have, in effect, priced in an end to the global rate hiking cycle. As such, the focus is now on rate cuts, and the central banks that reduce rates sooner and more quickly will likely see an underperformance with their currencies.

As it stands, Bank of America forecasts the Bank of England to keep rates on hold and not reduce rates before 2025

"We think risks skew to further hikes. At the same time, our economists think the European Central Bank is likely done but they expect rate cuts from June 2024, which is well ahead of the Bank of England," the Bank of America stated.

As such, this scenario creates an apparent central bank policy divergence that would weigh on the single currency but provide support for Sterling.

"We remain of the view the BoE won't help GBP much near term, but a 'high for longer' BoE could help GBP vs EUR later — we see EURGBP at 0.85 through our forecast horizon," according to Michalis Rousakis, an analyst at Bank of America.

Meanwhile, Bank of America forecasts one last rate hike by the Federal Reserve next month, "but it is a close call."

"We look for the first rate cut in June 2024, with QT to end at the same time but risks for a longer runoff period. Importantly, we look for quarterly 25bp reductions in the policy rate, for a total of 75bp of rate cuts in 2024 and 100bp of cuts in 2025," Rousakis added.