In spite of the general weakness observed in the US dollar, GBP/USD is encountering challenges in maintaining levels above $1.27, largely due to investors scaling back their optimistic positions on the pound after eight consecutive weeks. The 3-month implied volatility for GBP/USD has reached a four-year low, indicative of investor complacency and the currency's consistent performance.

The subdued atmosphere in the foreign exchange market has heightened the popularity of carry trades, benefiting the pound as a higher-yielding currency. This trend has been supported by the hawkish reassessment of UK interest rate expectations. While the assumption that the Bank of England (BoE) will delay interest rate cuts compared to the Federal Reserve and the European Central Bank (ECB) has favored the pound in recent months, the sustainability of this advantage is uncertain. Money markets are currently pricing in fewer than three rate cuts by the BoE before the year-end, a significant reduction from initial expectations at the beginning of the year.

On the economic front, we believe that the UK has already exited its technical recession, and the potential for a faster decline in inflation increases the likelihood of a consumer-driven recovery in UK GDP growth in 2024.

Although this week's UK data docket is relatively quiet, the Confederation of British Industry's monthly retail sales balance, a measure of sales compared to a year ago, showed improvement, rising to -7 in February from -50 in January—the slowest decline in 10 months. Despite this, the pound is experiencing a decline across various currency pairs, with GBP/EUR slipping back below the €1.17 threshold.

Yesterday's stronger-than-expected UK PMIs indicate that the technical recession in the UK may already be over. Private sector output in the UK expanded for the fourth consecutive month, reaching its fastest pace since May 2023. The robust performance is driven by a strong service sector (PMI of 54.3), outperforming the Eurozone (PMI of 50). Although GBP/EUR remains below the €1.17 mark, GBP/USD is holding above $1.26, rebounding from a three-week high above $1.27, marking a potentially strong week for the currency pair in 2024.