BoE’s interest rate cuts in the middle of the year will put pressure on the Pound

The Pound Sterling (GBP) has performed surprisingly well over the past few weeks. Economists at Commerzbank analyze GBP outlook.

Slightly better outlook, but no reason to cheer yet

There are early signs that progress is being made on inflation. But the all-clear cannot be given just yet. The fact that the BoE has a similar view has been supportive for the Pound recently.

We still expect the BoE to cut interest rates for the first time in August. At the same time, we now expect the ECB to cut rates as early as June. In view of this and the recent cautious tone of the BoE, we have therefore slightly lowered our EUR/GBP forecast.

Nevertheless, we still expect slightly higher EUR/GBP rates in the coming months. One reason for this is that while the ECB is likely to start its rate cutting cycle before the BoE, it will ultimately deliver fewer rate cuts than the market is currently pricing in. This should become clearer in the coming months. In addition, there may be renewed speculation in the second quarter that the BoE will cut rates sooner rather than later if inflation falls below 2%. This is likely to weigh on the Pound.

By the end of 2024, however, things should change again. It is likely to become clearer that inflation in the Eurozone is settling at too high a level. At the same time, the UK is likely to grow slightly faster than the Eurozone by then. Nevertheless, one should not expect miracles in terms of growth. Growth in the UK is also likely to level off below the pre-Corona trend. The Pound's upside potential vs. the Euro in 2025 is therefore likely to be limited to some extent.

Source: Commerzbank Research

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