Ren Garcia 
While the decrease in gas prices may provide some backing for the UK economy, the bank predicts that the UK will not perform as well as other countries globally, particularly due to the strong influence of the services sector, says JP Morgan economists. The bank anticipates that the Bank of England will adopt a more cautious monetary policy approach, reducing support for yields. Additionally, JP Morgan believes that the economy’s structural difficulties will undermine its growth potential, ultimately harming the Pound in the medium term. Overall, the bank predicts that the Euro to Pound (EUR/GBP) exchange rate will rise to 0.94 by the conclusion of 2023 (with GBP/EUR at 1.06) and that the Pound to Dollar (GBP/USD) exchange rate will also weaken, reaching 1.15 by the year’s end.
UK Services-Sector Dependency Limits Recovery Potential
According to JP Morgan, the UK economy will benefit from the drop in gas prices, but it continues to have weak fundamentals.
“Overall though, we consider that there are still reasons to be cautious on the outlook for the UK property market, services sector, consumer, and supply side labor market,” the statement continues.
The bank anticipates that the UK economy would do worse than other risk-sensitive currencies, particularly those with significant commodity exposure.
In this regard, it is stated that “The UK struggles to rely on alternative revenue sources that, for example, commodity-producing countries can accomplish” while having one of the highest shares of value added in services in the world.
BoE Turns More Dovish
Overall yield movements will eventually have a significant impact on the Pound.
The UK is one of the G10 countries that are most sensitive to rate spreads, according to JP Morgan, so slight dovishness from the BoE might have an impact.
It mentions that the BoE changed its advice at the most recent policy meeting by removing statements that it will act more strongly if necessary.
A transition to a more data-dependent mode can be expected given the likely imminent conclusion of the hiking cycle, according to JP Morgan, which also mentions that wages and inflation data would be constantly monitored.
Structural Weaknesses Continue in the UK, Significant Impact on Pound
Due to supply-side issues, the Bank of England reduced its medium-term estimate of the UK GDP growth potential to slightly around 1.00% in the most recent Monetary Policy Report.
JP Morgan concurs that these issues, with a particular focus on the labor sector, will significantly undermine the economy. “From a medium-term view, a recurring market theme for our thinking about Ppund has been the severe supply-side labor market pressures that are more obvious than in other economies,” the report states.
Additionally, it assumes that these fundamental flaws will weaken the value of the Pound in the medium run, preventing any revaluation of the currency.
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