Analysts at Danske Bank, point out that UK growth disappointed significantly to the downside in Q1, but going forward, they think relative rates will return as GBP positive, which alongside Brexit clarifications should driver a stronger GBP.
Key Quotes:
“Q1 GDP growth was weak but the initial estimate was lower than what indicators like PMIs suggested and we would not be surprised if it is revised up to 0.2% q/q from 0.1% q/q, as we get more information. We also expect growth will be slightly higher later this year, although still weak compared to European peers. CPI inflation declined to 2.5% y/y in March from 2.7% in February. While the decline in inflation in March mainly was due to temporary effects such as clothing and footwear, and look for a modest rebound in April, we still expect the downward pressure on CPI inflation to continue this year due to the fading impact of previous depreciation of
sterling. We forecast CPI inflation at 2.4% y/y by the end of 2018.”
“In our view, the BoE signalled that the hiking cycle is postponed, not cancelled, but there will be fewer rate hikes than previously thought. We stick to our call with one hike in H2 18 and one in 2019 with the next hike likely in August. The market is pricing around a 50% probability of a rate hike in August.”
“With an August rate hike still in sight, in our view, we see relative interest rates as neutral for EUR/GBP for now, but expect GBP to eventually gain support from the rate channel. Longer term, Brexit still remains a key driver for GBP, and while uncertainty remains high, we still expect EUR/GBP to eventually trade lower driven by Brexit clarifications and fundamental valuations. The turn in capital flows and FDI flows back into the UK, as indicated in the latest balance of payment data, suggest that a key headwind to GBP seen in Brexit is reversing.”
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