Danske Bank highlights potential for a GBP turnaround, buoyed by recent updates on the UK labor market and PMI revisions, suggesting a tighter than expected labor market. With the market dialing back on BoE rate cut expectations (now pricing 85bp cuts for 2024), GBP emerges as a strong performer this year. Danske maintains a cautious stance on central bank rate cut expectations, foreseeing the BoE's first 25bp cut in June, with balanced risks to this forecast. The bank maintains a bullish outlook on GBP, recommending short GBP/USD and long EUR/GBP positions.
Labor Market Tightness: Revised ONS labor force survey data indicates a declining unemployment rate, reaching 3.9% in November 2023, contrary to earlier experimental releases. This suggests a stronger labor market, posing challenges for the BoE's easing path.
PMI Revisions: January's final PMI readings were upwardly revised, with composite at 52.9 and services at 54.3, further underscoring economic resilience and challenging the case for immediate BoE rate cuts.
Rate Cut Pricing: Current market pricing reflects a more conservative stance towards BoE rate cuts compared to the Fed and ECB, contributing to GBP's strong performance.
GBP Outlook: Danske Bank sees potential for GBP appreciation, driven by a recalibration of rate cut expectations and the UK's relative economic strength. The bank maintains specific trade recommendations to capitalize on this outlook.
Danske Bank's analysis suggests a promising trajectory for GBP, supported by recent labor market strength and upward revisions in PMI data. The bank's continued long exposure to GBP against USD and EUR reflects a confidence in GBP's resilience and potential for gains amid a reassessment of central bank rate cut expectations. As markets adjust to the updated economic landscape, GBP positions offer attractive opportunities for investors looking to navigate the evolving monetary policy environment.