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Feb 06 - 12:55 PM

Danske: Anticipating a GBP Turnaround with Long Exposure Against USD and EUR

By eFXdata  —  Feb 06 - 10:52 AM

Synopsis:

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.

Key Insights:

  • 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.

Conclusion:

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.

Source:
Danske Research/Market Commentary

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