Sterling gains look premature as banks warn on UK-EU reset and weak UK growth

The recent gains in the pound are perceived as overly optimistic amid warnings from banks about the structural and cyclical challenges the UK faces. Commerzbank indicated that any improvement in UK-EU relations would be gradual and conditional, deeming it too early for the markets to price in positive outcomes. The UK's underlying economic weaknesses, particularly low productivity growth, further limit the impact of enhanced EU ties. Danske Bank echoed these sentiments, cautioning that the pound's strengthening is excessive, driven largely by external conditions rather than solid domestic progress, increasing the likelihood of further easing from the Bank of England. These perspectives suggest that optimism for the pound might be vulnerable to reversal unless significant progress is made on key economic indicators.