There’s a reason to be skeptical about further Pound Sterling (GBP) strength. Even though, there is much to be said for a stronger pound at the moment – stubborn inflation, a recovering real economy and the hopes associated with the new Labour government. Much of the positive case is based on hope – basically, GBP is in a kind of honeymoon phase. But these hopes have to be realised first, Commerzbank’s FX analyst Michael Pfister notes.
GBP has less reasons to be bullish
“There are two events this week that should provide an initial assessment of where GBP is heading. Later today, the new government is expected to have to plug a £20 billion hole in the new budget. Although the parties are blaming each other for the situation, filling this hole is likely to require difficult decisions. The autumn budget is likely to be the main focus.”
“Also, Bank of England’s (BoE) meeting on Thursday is likely to be of particular importance for GBP. Our economists believe that the BoE is likely to initiate a turnaround on interest rates, given that the headline rate has recently been on target. Much will depend on how the BoE justifies such a move. It would probably have to sound quite cautious in order to keep GBP supported.”
“There are definitely some risk factors for the GBP this week. This is not to say that we are not bullish on the GBP in the medium term. It’s just that we have to factor into our forecast the risks of a more dovish BoE and a weakening real economy, as well as the problems facing the Labour government.”
