GBP continues to stand strong, supported by data indicating a 2.5% increase in British house prices in the year leading up to January, marking the most robust annual growth rate in a year. This signals potential signs of a revitalised momentum in the housing market, reinforcing the recent assertive stance from the Bank of England (BoE).
Deputy Governor Sarah Breeden of the Bank of England (BoE) has indicated a lack of interest in implementing interest rate cuts. Instead, the focus is on determining the duration of maintaining current levels, rather than contemplating rate hikes. While this perspective aligns with that of numerous BoE policymakers, some, particularly the most dovish ones, have cautioned about an imminent economic downturn with rates reaching 16-year highs. The recent vote split at the BoE's meeting reflects this divergence, with two members advocating for a hike and one favouring a cut. Our alignment with the current market consensus suggests that cuts are likely to occur from summer onward, following the Federal Reserve's shift. We anticipate GBP/USD to approach $1.30 by the end of the year, driven by yield differentials favouring the pound. Nevertheless, persistent risks of UK stagflation pose a challenge.
In the short term, factors such as seasonality and positioning appear less favourable for GBP. Despite the positive rebound against the USD and other currency counterparts this week, a retreat towards GBP/USD 1.25 cannot be ruled out.
Once again, the calendar for today appears relatively subdued, devoid of significant data releases from both sides of the Atlantic. Although multiple speakers from the European Central Bank (ECB) are slated to address audiences throughout the day, any potential impact on the current ECB rhetoric is expected to be minimal. On the U.S. front, there may be a degree of interest in the jobless claims report, particularly given Federal Reserve Chair Powell's emphasis on the significance of U.S. labour market reports in the recent Federal Open Market Committee (FOMC) meeting.
