The pound may regain ground against the euro, following three weeks of declines, due to the strong performance of the U.K. economy, according to Bank of Tokyo-Mitsubishi UFJ Ltd.
Britain’s gross domestic product rose 0.7 percent in the second quarter from the three months through March, according to the median of analyst forecasts in a Bloomberg survey before the data are published next week. This would match an initial estimate in July. Sterling is set for its longest run of weekly losses since April versus the euro, as traders used the common currency to reduce risk positions amid a slowdown in China’s growth and a sharp decline in European stocks.
“In the very near-term, the pound is weakening modestly against the euro,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi in London. This has been driven by “the fallout from the concerns over slowing growth in China and emerging markets more broadly. The domestic story in the U.K. remains supportive for the pound. The U.K. economy is still expanding solidly, supported by stronger wage growth and recent pick-up in productivity.”
The pound declined 1.9 percent this past week to 72.37 pence per euro as of 6 p.m. London time Friday, the biggest weekly drop since July 24.
The U.K. currency will appreciate to 69 pence per euro by year-end, according to the median forecast of analysts compiled by Bloomberg. Supporting these bets is speculation that the Bank of England is moving closer to raising interest rates.
With forward contracts based on the sterling overnight index average, or Sonia, signaling a 25 basis-point increase to the BOE’s 0.5 percent main rate in August 2016, traders are scrutinizing economic data for clues on the strength of the U.K. economy and particularly the inflation outlook that may guide policy makers.
This week, inflation unexpectedly accelerated to 0.1 percent in July from a year earlier, boosting the pound. Separate data showed that retail sales rebounded last month less than analysts forecast, reigniting sterling losses against the euro.
The pound rose 0.4 percent to $1.5708 in the past five days. Even so, on a trade-weighted basis, the pound dropped to the weakest level since July 10 on Friday.
(Corrects spelling of Bank of Tokyo-Mitsubishi in third paragraph in story published Aug. 22)