While the UK’s higher interest rate structure might help the pound hold up against the US dollar, we see it underperforming other currencies such as the euro and Japanese yen over the third and fourth quarters – and progressively losing ground against the Australian dollar as 2023 rolls on. This reflects our comparatively-bearish take on the country’s economic prospects, exacerbated by a persistently large current account deficit and weaker terms of trade.
The British economy has so far held up better than anticipated. But with interest rates moving deeper into restrictive territory, and real wages remaining negative, we believe a sharp slowing in activity in the outsized household consumption sector is on the horizon. At the same time, investment trends remain sluggish, with the aftereffects of Brexit constraining potential growth. This combination points to rising odds on a rather meaningful deterioration in the labour market over the period ahead. If realised, this could see markets pare back remarkably bullish terminal rate projections, taking some of the heat out of the pound