Sterling’s recent gains may be premature, with analysts warning that optimism about UK-EU relations and the UK’s domestic economic outlook is likely overstated.

Commerzbank advises caution against pricing in a swift improvement in UK-EU relations. While closer ties could ultimately support the pound, any movement towards enhanced access to the EU single market is expected to be slow, conditional and politically costly for the UK, requiring significant concessions.

The bank also points out that some of the UK’s fundamental economic issues, such as weak productivity growth, existed before Brexit. This limits the extent to which improved EU relations alone can transform the economic outlook. Although sterling would likely benefit from meaningful single market access, Commerzbank says it remains “simply too early” for markets to assume such positive developments. Recent UK government legislation aligning parts of domestic law with EU standards is viewed as a step towards engagement rather than a guarantee of economic improvement.

Danske Bank considers sterling’s recent strengthening to be overdone and largely driven by improved global risk sentiment and reduced concerns over UK fiscal credibility. It highlights that the UK economy remains fragile, with subdued growth and tighter fiscal policy increasing the likelihood of further monetary easing by the Bank of England.

Danske contrasts this with the eurozone’s more supportive fiscal stance, noting that the relative economic outlook between the UK and euro area weighs against sterling. This dynamic underpins their view for a weaker pound against the euro.

Together, these perspectives suggest sterling faces both structural and cyclical challenges. Near-term optimism could easily reverse without clear progress on economic growth, productivity improvements and supportive policy measures.

Original Source: Eamonn Sheridan of investinglive.com