British economy more resilient than expected, pound near one-year high against dollar

Investment banks are increasingly optimistic about the British currency, which is trading near a one-year high against the dollar and a five-month high against the euro, as many believe that the United Kingdom’s economy is performing better than expected.

On Tuesday, the pound was trading at $1.2618, close to the $1.2688 it reached on Monday, which is the highest level since April 2022. For the euro, 0.8698 pounds were purchased, marking the strongest level of sterling since mid-December.

Analysts believe in the continued recovery of the pound, which has risen this year on a series of strong GDP, manufacturing, and employment data, as well as due to falling natural gas prices and dollar weakness.

Goldman Sachs stated that they hold a fully constructive view and expect the pound to strengthen against other currencies, including the euro, according to the Financial Times. Many traders who bet against the pound earlier this year, amid predictions of a deep recession, have slowly changed their minds in recent weeks, which has also contributed to the rise of the British currency.

The investment bank Citigroup, which has undermined the pound for months, wrote in a note this week that they ‘were wrong’ and that ‘contrary to what they expected, activity in the United Kingdom has proven to be more resilient.’

Further rate increases expected

The strength of sterling comes ahead of the Bank of England’s interest rate meeting on Thursday, which is expected to result in a rate increase of a quarter percentage point, in line with data from the Fed and the European Central Bank from last week. At least two, if not three, more rate hikes are expected by September.

Christian Kopf from Germany’s Union Investment expects the euro to weaken further against the pound from its current level of 0.87 to 0.83 by the summer of next year. The main reason for this prediction is higher interest rates in the United Kingdom compared to Europe, the impact of Brexit on trade, which is becoming less pronounced, and the weakening of the euro and Swiss franc as ‘safe currencies.’

According to data from the U.S. Commodity Futures Trading Commission, traders showed a positive attitude towards the pound for the first time in 14 months last month, but still, more traders are betting on the strength of the euro than on the pound.

British NatWest expects the pound to strengthen to $1.30 by the end of the year, and they also stated that lending in the U.S. will be weaker than in the United Kingdom. NatWest believes that the UK’s reliance on services rather than manufacturing will certainly benefit the domestic currency.

Citigroup, on the other hand, expects the euro to continue trading in the range of 0.87 pounds to 0.89 pounds, but that the pound will continue to rise against the dollar. It is certainly important to note that the smooth implementation of trade rules post-Brexit, as well as the establishment of Rishi Sunak’s government, has also worked in favor of sterling.