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Institutions are optimistic about the British economy and are wary of the risk of interest rate cuts limiting the upside of the pound!

2024-07-17

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Goldman Sachs, IMF, Deutsche Bank and other institutions are optimistic about the UK's economic prospects. After the Labour Party won the general election, the UK's politics became more stable, and the party also promised to implement relevant policies to stimulate the economy, which are all factors that are good for the pound. However, the UK will announce June inflation this week. If it rises, it may stimulate the Bank of England to cut interest rates, which is a risk facing the pound.

Investment banks are optimistic about the UK's economic prospects

On July 16, the IMF raised its forecast for UK economic growth in 2024 from 0.5% to 0.7%, which boosted the new British government, making the UK's ranking rise from the second-to-last place just before Germany in 2023 to the same position as Italy and Japan.

The IMF reiterated its forecast of 1.5% economic growth in the UK in 2025, when the UK will rank third in the G7 with a growth rate of 1.5%, second only to Canada and the United States.

The Labour Party won the general election less than two weeks ago, promising to reform the planning system and increase public and private investment.

After two years of stagnation, the UK fell into a mild recession in the second half of 2023. However, GDP growth in May exceeded analysts' expectations, reaching 0.4%, while events including the 2024 European Championship are expected to boost economic activity.

Earlier this month, Goldman Sachs raised its forecast for UK economic growth in 2025 by 0.1 percentage point to 1.6%. The report cited the fiscal plans of the new Labour government, which include planned reforms and closer trading ties with the European Union.

On Friday, Deutsche Bank joined Goldman Sachs in raising its expectations for the UK economic outlook. The bank's economists said in a report that they now expect UK GDP to grow by 1.2% this year, far higher than the previous forecast of 0.8%.

Deutsche Bank said Germany's May GDP showed strength in the professional services and construction sectors, and the European Championship is expected to further boost the hotel and leisure sectors.

Meanwhile, analysts at Jefferies said in a recent report that the size of the Labour Party's majority in Parliament will make the UK appear "relatively stable", which, together with regulatory reforms, may increase the attractiveness of UK assets.

BNP Paribas said that political factors are another positive factor, as the Labour Party won an overwhelming victory in the general election and ushered in a period of political stability, which should be a good sign for the pound.

Rising inflation and Bank of England rate cuts are still potential risks for the pound

Although investment banks are optimistic about the UK's economic prospects, which is good for the pound, they are still wary of potential risks: rising inflation and Bank of England rate cuts.

At 14:00 on July 17 (Wednesday) Beijing time, the UK will release June inflation data.

BNP Paribas said in a report: "Inflation and employment data will be released this week, and the threshold for the data to be weak enough for the Bank of England to take a more dovish tone may be high."

Michael Pfister, a foreign exchange analyst at Commerzbank, said that before the May interest rate meeting, UK inflation data also showed that inflation stickiness was more persistent than expected. But the Bank of England still sent a dovish signal at the May meeting. In short, the market should not underestimate the fact that the Bank of England is about to reverse the interest rate trend, even if some policymakers now point out that there are inflation risks.

If the Bank of England cuts interest rates for the first time in two weeks, that could limit the pound’s upside potential, at least in the short term, Pfister said.

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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Institutions are optimistic about the British economy and are wary of the risk of interest rate cuts limiting the upside of the pound!

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