In recent weeks, the Pound Sterling (GBP) has recovered significantly against the euro, with the exchange rate now standing at around 0.84 instead of 0.87. While the trade deal with the US certainly played a role in this, higher-than-expected inflation in April also made it clear that the Bank of England (BoE) cannot cut interest rates as quickly as previously thought, Commerzbank’s FX analyst Michael Pfister notes.
GBP is likely to appreciate more slowly from now on
“What is new is that the state of the real economy is not quite as bad as it was a few weeks ago. On Thursday, the initial estimates for the purchasing managers’ indices in May were released. Although the manufacturing PMI fell unexpectedly, this sector has played virtually no role in UK growth in recent years. More decisive was the fact that the services PMI climbed back above the 50 mark, suggesting weak growth. Retail sales for April were even better than expected. In the first four months of the year, sales were significantly better than at the end of last year.”
“While there were fears of stagflation a few weeks ago, the outlook in the UK now looks brighter. Some commentators are revising their Bank of England (BoE) forecasts, arguing that the real economy does not need further monetary stimulus. We would be somewhat more cautious here, though. Although our economists recently revised their UK growth forecast upwards, the increase was only slight. Instead, we feel that our recent forecasts have been confirmed. UK macro figures were surprisingly good in the first half of 2024, only to weaken significantly in the second half.”
“We have frequently pointed out that the underlying trend is likely to lie somewhere in the middle. Now that the figures are strong again, we feel confirmed in our view that the British economy is in better shape than it appeared just a few weeks ago. At the same time, however, we would caution against expecting miracles. We therefore assume that the pound is likely to appreciate more slowly from now on, although we are maintaining our positive outlook.”
