PoundSterlingLIVE - Analysts at investment bank Nomura are constructive on Pound Sterling as the incoming data points to the Bank of England cutting interest rates after the European Central Bank and Federal Reserve.
Commenting on the Pound's outlook, Nomura economists say February's UK PMIs show the strength in the services sector will keep interest rate cuts at the Bank of England at bay until August.
The UK reported services PMI figures for February that beat expectations and suggest the economic recession of H2 2023 has ended. The data helped support the Pound to Euro exchange rate recover from a low at 1.1661 on Thursday to 1.17 at the time of publication on Friday.
The PMI survey also revealed that service sector price pressures remain high, which will be of concern to the Bank of England, which has signalled it will only cut rates when it is confident this type of inflation has been tamed.
"The price indices in the services PMI gradually are picking up, indicating 'homegrown' inflation is sticky, with the rising UK official wage data likely one of the causes, making it difficult to return services' inflation to 'normal' levels," says Nomura.
Analysts say this will ensure the Bank of England will keep the door open to early rate cuts to make its policy operation flexible; however, "the Bank is not in a position to consider commencing its rate cutting cycle in earnest yet".
Nomura expects the first rate cut by the Bank of England to be in August, which is later than the expected first rate cut by the Fed and ECB (both in June).
"So the BoE’s less dovish stance should help GBP remain resilient in G10 space," says Nomura.
At 54.3, the UK's service sector put in a stronger performance than the Eurozone's equivalent at 50. The UK composite - which weights services and manufacturing to give a better account of the broader economy - read at 53.3 against the Eurozone's 48.9 (which, being sub-50 is still contractionary).
"UK composite PMI is out to its highest spread over Eurozone equivalent since Q2 2022. This is consistent with economic growth picking up at the start of 2024," says Simon French, Chief Economist and Head of Research at Panmure Gordon.
The above image showing divergence in Eurozone and UK economic activity according to the PMI survey is courtesy of @ Simon French
While Nomura is "relatively positive on GBP", it is neutral on the Euro.
"The level of the euro area composite PMI still indicates the region's economy is in contraction, and has not outperformed that of U.S. growth. Overall, we think EUR/USD's movements in the near-term will remain range bound, and unlikely to breach 1.10 in the next coming weeks," says Nomura. "It may go above 1.09, the level it reached before the U.S. NFP surprise earlier this month."
However, Nomura thinks strength will likely be temporary.
"For EUR/USD to clearly and persistently breach this range in either direction, we think the market needs to be more confident about which central bank will cut first, the amount of cuts in 2024 and/or developments on the economic growth," say analysts.
An original version of this article can be viewed at Pound Sterling Live