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The British pound (GBP) is experiencing a significant rise, reaching new heights since Brexit. This increase has pushed the Bank of England's Trade Weighted Index (BoE TWI) past its previous March peak, reaching levels not seen since June 24, 2016, when the pound plummeted following the UK's decision to leave the European Union. This growth is likely driven by rising yields rather than just political changes.
The UK's GDP recovery is stronger than expected, showing resilience after the 2022-23 energy price shock. Recent data, like the CBI Distributive Trades Survey, indicates a robust rebound. In May, retail sales recovered notably after a poor April performance due to bad weather. The Volume of Sales index jumped from -44 to +8, its highest since December 2022, and the Orders Placed index saw its biggest one-month increase since September 2019.
UK GDP
Inflation is also playing a key role. Retailers reported a sharp drop in selling prices in May, with the Reported Selling Price index falling from 54 in February to 20. This is the second-largest drop on record, only surpassed by the early pandemic period in 2020. Lower inflation is likely to boost market sentiment and improve economic data.
Retail Sales UK
The Bank of England's cautious approach to waiting for underlying services inflation to decrease may lead investors to expect higher real yields, benefiting the pound in the short term. The British Retail Consortium's data supports this positive outlook, showing retail inflation in early May at 0.6%, the lowest since late 2021. Food inflation is at 3.2% year-on-year, while non-food items are seeing deflation at -0.8%. This is good news for UK consumers, who might see a rise in real incomes.
With continued low FX volatility, the GBP could attract more carry interest. The upcoming UK election is not expected to cause significant uncertainty or volatility. Based on recent CPI data for April, we no longer expect a rate cut in June. The upcoming general election reduces the likelihood of a June cut, but we anticipate a rate cut in August, providing a favourable window for the GBP to perform well.
Adding to this positive outlook, the BoE TWI's new post-Brexit highs are complemented by GBP/JPY breaking through the 200-level, reaching heights not seen since just before the global financial crisis, indicating increased carry demand.
Insights Inspired by MUFG (USD/JPY renewed focus as carry appetite persists): Credit to Their Analysis for Shaping Some Aspects of This Text
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