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Analysts at MUFG Bank, expect a more volatile pound in the week ahead. Beyond broader developments in risk sentiment, the outcome from the latest Brexit talks and the Bank of England monetary policy meeting are likely to be important for GBP performance according to MUFG analysts. 

Key Quotes: 

“Broad-based USD weakness has helped to lift cable back up towards the 200-day moving average at 1.2690 from a low of 1.2076 on 18th May. It marks an improvement in fortunes for the GBP after last month’s disappointing performance when it was clearly the worst performing G10 currency despite the improvement in global investor risk sentiment.”

“GBP has been lagging other recovery trades driven by the BoE’s decision to review policy options including negative rates, and the lack of progress in Brexit trade talks. These two factors have held the GBP back. In this light, the week ahead could prove important for GBP performance. There is high level of event risk which favours a more volatile pound.”

“Prime Minister Boris Johnson is scheduled to take part in a video conference on Monday with European Council President Charles Michel, European Commission President Ursula von der Leyen and European Parliament President David Sassoli.”

“For the GBP rebound to extend, some form of compromise will be needed to inject fresh dynamism into trade talks.”

“Ahead of the (BoE) meeting it has been confirmed that the UK economy collapsed by a record -20.4% in April. It will reinforce expectations for the BoE to announce further policy easing as soon as next week. At this stage, we expect the BoE to favour a further expansion of asset purchases with the current purchase plan of GBP200 billion set to run out.”

“The GBP reaction is likely to depend more though on any update on the BoE’s latest thinking on negative rates. The GBP could stage a relief rally if the updated BoE communication does not reinforce negative rate speculation, and vice versa.”
 

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