Outlook brightens for Pound Sterling – MUFG

GBP/USD advanced above 1.2700 for the first time in three weeks on Thursday. Economists at MUFG Bank analyze the Pound Sterling (GBP) outlook.

The upturn in risk sentiment globally will allow the BoE to remain patient

The UK data on Thursday was indicative of an improving outlook and the technical recession that took place in the second half of last year looks like it is probably over. 

The upturn in risk sentiment globally will certainly allow the BoE to remain patient, similar to other central banks. But good news is still coming and the prospects of inflation hitting the 2% target in April remains plausible. If the Fed and ECB are delaying the timing of the first rate cut, the BoE will be too. The first cut is fully priced for August in the UK.

The better UK data and the strong risk appetite should be benefitting the Pound more than what we are seeing to date. However, concerns over growth seem to be lingering and possibly holding GBP back. 

The GBP correlation with global equities has started to weaken but remains stronger than the USD/risk correlation and may prompt some GBP strengthening if this risk appetite persists.