The Pound Sterling (GBP) was the top performing G10 currency in January. Economists at MUFG Bank analyze GBP outlook.
GBP outperformance to persist over the shorter-term
The February meeting was important in sustaining the belief that the BoE will prove more reluctant in easing its stance given the greater inflation risks given the higher services inflation and wages. With that view maintained, we see scope for GBP outperformance to persist over the shorter term which may propel EUR/GBP lower from here.
We still believe the BoE, like other central banks, has probably overtightened and the initial reluctance to signal notable easing will likely give way and assuming the Fed and ECB cut in April-May-June time, we see the BoE cutting either in May or June. By then GBP outperformance will likely start to reverse and we then expect both GBP/USD and EUR/GBP to drift higher given our bearish USD view.
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