Despite Recession, Pound Poised for Resurgence

Market analysts from institutions including Bank of America and Credit Agricole SA anticipate the pound to reclaim its status as one of the year’s top-performing currencies, despite the UK economy’s recent slide into recession.

Citing signs of economic recovery and inflation rates doubling the Bank of England‘s target, analysts argue that prolonged high interest rates are likely, bolstering confidence in the pound’s future strength.

Data reflecting investor sentiment toward the currency supports this view, with bets for further appreciation witnessing a significant increase. Despite sterling’s recent dip against the dollar, analysts suggest there’s ample room for traders to bolster their exposure.

While the pound experienced a setback against the euro, breaking a seven-week run of gains following news of the UK’s recession, Bank of America likened it to “the dollar of Europe,” highlighting its resilience amid prevailing challenges.

Valentin Marinov, head of G10 currency research at Credit Agricole, acknowledges the UK’s struggles but remains optimistic, foreseeing the pound strengthening against the euro. He points to encouraging signs in UK business surveys and the labor market’s resilience.

Mark Nash, head of fixed income alternatives at Jupiter Asset Management, sees the possibility of a soft landing for the UK economy, suggesting that if activity improves and inflation recedes, it signals positive developments.

While tighter monetary policy could exert pressure on the pound in the long term, concerns remain about its impact on economic growth, particularly in the services sector.

MUFG Bank and State Street Global Markets remain cautiously optimistic about the pound’s outlook against the euro, with both observing resilient flows and investor sentiment favouring further euro weakness.

Bank of America’s bullish stance represents a notable shift from previous years, now predicting the pound to outperform most major currencies in 2024. Strategists cite improved domestic economic conditions, challenging previous pessimistic views on UK growth.

Despite ongoing uncertainties, analysts believe the pound is poised for a resurgence, fuelled by positive economic indicators and a shift in market sentiment towards the UK’s economic prospects.