GBP/USD: Limited upside potential, market has BoE’s rather hesitant approach at back of its mind – Commerzbank

GBP/USD has returned more or less to the levels seen prior to the announcement of renewed tax cuts on Wednesday. Economists at Commerzbank analyze the pair’s outlook.

What do positive data surprises from the real economy mean for Sterling?

It is not entirely clear how the Bank of England (BoE) would react if it turned out that the economy was more robust than assumed. This would also mean that contrary to its expectations, inflation pressure eases more slowly. In view of the BoE’s hesitant approach, it is questionable whether it would then really react with rate hikes, despite the central bank governor’s best efforts to give a different impression with his hawkish comments. That would then be rather negative for Sterling.

It is possible that even if there are positive surprises from the real economy in the UK, the market always has the BoE’s rather hesitant approach at the back of its mind. If that is the case that is likely to limit Sterling’s upside potential in the near future.