Monthly Wrap: GBP – Pound rocked by deteriorating UK economic outlook

Key takeaways:

• Pound fluctuates as UK economic outlook darkens.
• Signs of sticky inflation boost BoE rate hike bets.
• GBP Monthly lows: €1.12, $1.18, AU$1.73, NZ$1.89, CA$1.61
• GBP Monthly highs: €1.14, $1.24, AU$1.79, NZ$1.92, CA$1.65

The pound traded in a wide range over the past month as Sterling sentiment wavered in the face of an increasingly gloomy UK economic outlook.

After a subdued end to 2022 amid thin trading conditions, the pound initially struggled at the start of 2023 as UK service sector growth was revised lower in December’s finalised PMIs.

GBP exchange rates then came under additional pressure as clouds over the UK economy continued to darken, with analysts warning headwinds facing domestic growth are likely to increase through 2023.

These concerns were mitigated somewhat by the publication of the UK’s latest GDP figures. A surprise expansion of growth in November bolstered hopes the UK may have narrowly avoided a recession in 2022.

The pound’s recovery then received a shot in the arm as we entered the second half of January. This came as stronger-than-expected UK wage growth and core consumer price index pointed to inflation being stickier than previously forecast.

The data stoked Bank of England (BoE) interest rate expectations and propelled GBP exchange rates to a one-month high.

However Sterling struggled to sustain these gains, almost immediately falling the next week after January’s preliminary PMIs reported UK private sector growth fell to a two-year low.

Looking ahead to the coming month, the key focus for GBP investors is likely to be the BoE’s latest interest rate decision.

It’s widely assumed the BoE will pursue another 50bps rate hike in February, but its outlook for future hikes is less clear. If the split within the bank’s monetary policy committee grows wider the pound could plummet.

In the meantime, 1 February will see a national day of action by UK unions. Concerns over the disruption caused by the latest wave of industrial action is likely to weigh on Sterling sentiment.