GBP: Still upside potential - Commerzbank

The Pound Sterling (GBP) has come under some pressure as a result of recent concerns about the global economy and the fact that the Bank of England began the cycle of interest rate cuts at the beginning of August. However, we continue to expect GBP to strengthen in the coming months on the back of continuing inflation, a recovering real economy and the prospect of a more stable government. But it remains to be seen whether the hopes associated with the change of government will be realised, Commerzbank's FX Analyst Michael Pfister notes.

GBP to strengthen in the coming months

"As concerns about the global economy peaked in late July/early August, GBP came under significant pressure, giving up much of its gains for the year. This was not surprising, as part of GBP's strength was based on the fact that the UK economy had recently recovered somewhat. Logically, when concerns about the economy arise, some of this strength is lost."

"In addition, the Bank of England (BoE) cut interest rates for the first time at the beginning of August, which certainly did not help the pound in this environment. GBP has since recovered at least some of its losses. And we see further upside potential in the coming months. Although we have increased our EUR/GBP forecast by one cent over the forecast horizon to reflect our expectation of a stronger euro, we continue to believe that GBP should outperform the Euro for the time being."

"We also see risks. Growth in the UK does not yet appear to be on as firm a footing as would be desirable. The underlying trend is likely to be somewhat lower than recent growth figures. Moreover, the UK still has a lot of catching up to do with other countries that have grown much more strongly in recent years. And the political situation still leaves us wondering whether the optimism will actually materialise."