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Pound to beat the pessimism in 2023, say experts

Peak pessimism towards the British Pound may be close to passing says a year-ahead research publication from MUFG, the global investment bank and lender.

The Pound was the third-worst performing major currency of 2022 but stabilisation in gas prices and a more settled domestic political picture are among the factors setting the scene for gains in the coming months.

"Our sense as we enter 2023 is that we may have reached or will soon reach peak pessimism," says Derek Halpenny, Head of Research for Global Markets EMEA at MUFG.

The Pound retains an elevated correlation to the performance of global markets, tending to rally when investors are in an optimistic mood. But, any setback to sentiment tends to result in a lower Sterling, as has been the case in the early stages of the year.

"Better conditions globally and domestically should allow for a period of GBP outperformance," he adds.

The Pound could benefit if the UK economy confounds expectations and analysts at Morgan Stanley say GBP outperformance is one of their top ten surprises they are on the lookout for in 2023.

Oliver Rust, head of product at independent inflation data aggregator Truflation, says there is potentially too much negativity being heaped on the UK economy at this point.

"The UK is certainly in a tough spot, but whether it will suffer more than any other economy in the G7 - and as much as Russia - I am not sure. Many European countries and also Japan are facing similar challenges and it seems unlikely the UK will be significantly worse off," he says.

MUFG feels there are a number of factors that could see GBP turn a corner:

  • The blowout in the UK trade deficit has halved from its nadir

  • Energy price declines point to a further improvement in the trade deficit

  • A resolution to public sector strike actions looks more likely than not

  • The new government has adopted a credible plan to deal with the country's finances

  • Progress continues to be made with the EU on the outstanding issues concerning the Northern Ireland protocol

  • Finally, political certainty is set to make a return following a tumultuous 2022 that saw three Prime Ministers occupy 10 Downing Street.

"PM Sunak looks to have restored some order and credibility to the office of PM after his two predecessors and our sense as we enter 2023 is that we may have reached or will soon reach peak pessimism and this year could be a year of better sentiment toward the UK," says Halpenny.

Source: PSL

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