Pound Sterling Underpinned by Multi-month High in Consumer and Business Confidence Readings

• Pound extends recovery against Euro & Dollar
• UK consumer confidence at 18-month peak
• Business confidence at two-year high
• Puts at risk economists' predictions for H2 recession

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The British Pound has extended a recovery against the Euro and Dollar ahead of Wednesday night's Federal Reserve decision and Thursday's European Central Bank update, supported in part by some surprisingly resilient UK consumer and business survey data.

The Fed and ECB will ultimately determine whether the recovery can extend into the weekend, but the Pound's appreciation in recent days was helped by news UK consumer confidence hit an 18-month high in July while business confidence scaled a new two-year high.

Mathias Van der Jeugt, an analyst at KBC Bank says the Pound has pushed the Euro back to a key level (EURGBP 0.86) "after stronger-than-expected UK data".

According to PwC's Consumer Sentiment Survey, sentiment now sits at -13, which marks the latest uptick in a steady improvement from -44 in September 2022 and -32 at the beginning of January 2023.

PwC says sentiment "is virtually back to normal, being close to the long-term average since 2008."

The Pound to Euro exchange rate has recovered to 1.1663 on Wednesday, having been as low as 1.1492 last week and the Pound to Dollar exchange rate is at 1.2897, having been as low as 1.2798 at the start of the week.

A number of prominent economists and institutions anticipate the UK to fall into recession in the second half of the year as higher interest rates and elevated inflation bite and a number of currency strategists we follow see a retreat in the value of the Pound in tandem with this development.

But recessions rarely materialise in economies with such robust consumer sentiment and low unemployment and the risks to these calls for a weaker Pound lie to the upside should the economy continue to outperform expectations.

"Whilst inflation remains the biggest factor affecting finances, we're also seeing fewer people cutting back and spending intentions have consistently improved over the past 12 months," says Lisa Hooker, Leader of Industry for Consumer Markets at PwC.

The steady improvement in PwC's consumer measure echoes a six-month rise in consumer sentiment as measured by GfK, considered the gold-standard yardstick of UK consumer mood.

To be sure, GfK's measure unexpectedly fell six points in July, although the survey was conducted ahead of last week's surprise fall in UK inflation, which will reflect in next month's release.

Coming alongside the PwC report was the Confederation of British Industry's much-watched business optimism survey for July, which improved further from -2 in April to 6, reaching the highest level in two years.

The Total Orders and Business Optimism index rose month-on-month, while the Selling Prices index declined slightly from last month

"While the CBI index is not typically a major market mover, it suggests positive trends for the UK economy in July, with prices declining but orders rising," says Noah Buffam at CIBC Capital Markets.

The CBI revealed orders also improved from -15 to -9, the best reading this year and above the long-run average of -13. Both volume of output over the past 3 months (3 from -6) and expected output over the next three months (9 from 4) also improved.

The consumer and business confidence reading come ahead of the Bank of England's August 03 interest rate decision where at least 25 basis points of interest rate hikes will be delivered.

The Bank is anticipated to meanwhile guide the market to a further rate hike in September, which would mark a more 'hawkish' guidance when compared to the Fed and ECB which are expected to confirm this week that a September hike is less likely given cooling data.

This divergence between the Bank of England and its peers could underpin UK bond yields further, helping the Pound extend its recent recovery against the Dollar and Euro.

The survey data does however potentially paint a rosier picture of the UK economy than does S&P Global regular PMI survey which suggests the economy barely grew in July.

The composite PMI read at 50.7, which was less than the 52.4 the market was looking for and down on June's 52.8.

The Eurozone's PMI was meanwhile outright contractionary at 48.9, painting the UK in a slightly more resilient light and underscoring the Pound-Euro rate's recovery this week.

"After delivering another 25bps hike this week, the ECB may not commit as strongly to a further hike later this year in September or October," says Lee Hardman, Senior Currency Analyst at MUFG Bank.