Monex Looks for Pound Sterling Outperformance

Image © Bank of England

The British Pound can continue to outperform finds a new analysis from foreign exchange payment specialists Monex.

In a weekly currency briefing analysts at the firm's London office say the Bank of England will raise interest rates for a final time in this cycle in May as inflation in the UK is about to take a sharp dip lower.

Simon Harvey, Head of FX Analysis at Monex, says the Bank is unlikely to cut interest rates until at least 2024, which combined with an improved economic outlook, should underpin the Pound.

"We think the emphasis will likely shift to conditions around growth and investability as catalysts for price action, at least until rate cuts come into focus," says Harvey.

The analyst says UK growth continues to be more robust than expected, and asset valuations - that have been depressed by Brexit and recent political uncertainty - now look cheap on a relative basis.

UK GDP was flat in February but the ONS revised higher January's growth estimate to show 0.4% growth, taken altogether it is now clear the UK economy will expand in the first quarter of the year.

This defies the forecasts made by the Bank of England in late 2022 for an economic recession to take hold from end-2022 through to end-2023.

The Bank of England was not alone amongst the major institutions that warned the economy was set to contract, a view that formed a bearish consensus around the Pound.

Inflation and wage data meanwhile printed stronger than anticipated last week, prompting economists and market participants alike to say another Bank of England rate hike in May was assured.

"We have updated our call, and now look for a final 25bp hike at the May meeting, taking Bank Rate to a terminal level of 4.5%," says Harvey.

The prospect for further rate hikes at the Bank of England has underpinned UK bond yields which in turn generates Sterling-supportive capital inflows into the UK.

But Monex says central bank interest rate hikes are ceasing to be a main driver and what matters going forward will be relative economic performance.

"With this in mind, we see the current environment as broadly positive for the pound, and therefore expect to see modest appreciation over the course of 2023," says Harvey.

Monex says UK inflation will come down sharply over the coming months, which will ease the cost-of-living crisis in the UK.

"With the unemployment rate increasing to 3.8% in March, and an economy that continues to add jobs whilst hiring conditions simultaneously ease, this points towards a significant reduction in
wage pressures and inflation over coming months," says Harvey.

"Combined with last year's energy price rises dropping out of the consumption basket, the UK is set to see a sharp fall in CPI," he adds.