Recent UK economic data suggests a positive shift in the country's outlook, indicating a potential end to the technical recession experienced in the second half of the previous year. The UK Composite PMI for February rose from 52.9 to 53.3, marking the highest reading since May of the preceding year. S&P Global Market Intelligence interprets this PMI increase as a signal for GDP expansion of 0.2% to 0.3% in Q1.

Notably, there are signs of upward pressure on prices, with the input price index reaching its highest level since August, and output prices hitting the highest point since July. This data is likely to encourage the Bank of England (BoE) to adopt a wait-and-see approach, closely monitoring factors like shipping container traffic to assess the potential return of supply constraints and their impact on inflation.

BoE MPC member Megan Greene, who recently stopped voting for a rate hike, emphasized her cautious stance on cutting rates, stating the need for evidence that inflation is not entrenched. The global upturn in risk sentiment aligns with the BoE's patient stance, and while positive news continues, the prospect of inflation reaching the 2% target in April remains plausible.

Despite the favorable data, concerns over growth and a slight dip in GfK Consumer Confidence due to economic outlook worries may be holding back the Pound (GBP). Mortgage rates edging higher add to these concerns. The GBP's correlation with global equities has started to weaken but remains stronger than the USD/risk correlation. If the current risk appetite persists, it may prompt some GBP strengthening.

In conclusion, the combination of improving UK data, a patient BoE stance, and positive global risk sentiment suggests a bullish outlook for the GBP. However, lingering concerns over growth and potential headwinds may be restraining its full potential. Traders should monitor economic indicators, central bank communications, and global risk sentiment for potential trading opportunities in GBP pairs.

Bullish Outlook for GBP Amid Improving UK Data and Global Risk Sentiment

Mar 01 2024

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