The Pound to Euro (GBP/EUR) exchange rate traded near 1.1549 while GBP/USD held around 1.3395 on Tuesday, with Sterling continuing to benefit from elevated UK yield expectations.
Pound to Euro (GBP/EUR): 1.15491 (+0.07%)
Pound to Dollar (GBP/USD): 1.33922 (-0.01%)
Euro to Dollar (EUR/USD): 1.15959 (-0.09%)
However, Lloyds Bank warns that the Pound’s resilience is being driven more by rising UK interest rate premiums than by genuine economic strength.
“Sterling has proved remarkably resilient… but this does not reflect some underlying and underappreciated resilience, it is largely a function of the higher risk premium that has been pushed into the UK interest rate curve.”
The bank believes underlying UK conditions remain fragile, pointing to weakening labour market dynamics, falling vacancies and increasing strain on consumers.
“The UK is still stuck in its fiscal trap and demand and the labour market are brittle.”
Lloyds notes that sectors including retail, hospitality and leisure continue to face pressure, while productivity growth and competitiveness remain weak.
“Sterling’s resilience might confer a sense that these risks are still manageable. But the exchange rate is the economy’s most viable adjustment lever.”
The bank also highlighted rising political uncertainty and warned that tighter financial conditions and elevated energy costs could weigh further on UK growth during the second half of the year.
Importantly for FX markets, Lloyds said it continues to favour selling Sterling against several major currencies.
“We continue to favour GBP shorts versus EUR, NOK and AUD.”
