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Analysts at MUFG Bank, point out that the key determinants for the pound over the next few months will be the extent to which UK economic data improves on the back of reduced uncertainty after the December general election.

Key Quotes:

“The pound was the 2nd worst performing G10 currency overnight amid thin liquidity as markets grow nervous that the recent rally in the pound was overdone. On the last day of 2019 the pound climbed from near the 1.3100 level to a 2-week high above 1.3280 and there is concern that this rally may be unsustainable, given the risks further down the line this year of a No Deal Brexit.”

“Pound volatility has eased recently but remains higher than in other major currencies reflecting in part ongoing uncertainty over various outcomes of trade negotiations between the UK and the EU this year.”

“In the near term markets appear to be more cautious about a marked improvement and rates markets are currently pricing in nearly 20bps of interest rate cuts by May this year. In addition, recent comments from the BoE have been more on the dovish side, with Jonathan Haskel saying that “a lower rate and a more protracted period of looser monetary policy” was more appropriate at the moment. At the moment there is still significant uncertainty about the macroeconomic direction over the next few months and so we expect the pound could be more sensitive to data releases going forward.”