Pound sterling – Modest appreciation ahead

by: Georgette Boele

We have upgraded our outlook for the UK economy, reflecting an improvement in economic conditions. This is in line with a modest appreciation of the GBP versus the EUR going forward. Last week UK economic data came in close to the expectations. The UK employment report was a touch better though with a sharper decline in jobless claims and higher weekly earnings. With the sentiment on the UK improving the sterling was able to resist most of the strength of the EUR. The cross remained in a 0.8470-0.8550 range. This week, inflation data and retail sales will be released. If inflation data come in lower-than-expected the sterling should receive support because it improves the perceived unfavourable growth/inflation mix. Higher than expected retail sales would be a sign that the UK economic is gaining momentum and this should also support the sterling. All in all, we expect a modest appreciation path from here.