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Analysts at MUFG Bank warn about chasing the pound higher ahead of key event risk posed by the upcoming Bank of England monetary policy meeting, and with the GBP/USD pair becoming heavily overbought against the USD.

Key Quotes:

“The GBP has become heavily overbought against the USD suggesting caution in continuing to chase cable higher in the near-term. However, the GBP’s recent performance on a trade-weighted basis has been less impressive as it remains around -1.7% lower than in late April.”

“Market participants will be closely scrutinizing the BoE’s upcoming policy meeting on Thursday for a fresh GBP catalyst. The BoE is expected to maintain an unchanged policy stance after only just extending their QE programme by GBP100 billion at their last meeting in June. More importantly for GBP performance will be any further insights into the likelihood of further policy easing later this year which could include another expansion of QE and/or lower (negative) rates.”

“We still expect the BoE to express caution over the highly uncertain economic outlook given the risk of further disruption from a second COVID wave, and the risk of another hit to growth later this year when the job furlough scheme expires in the autumn.”

“We believe that the BoE will deliver further policy stimulus in November. It leaves the upcoming BoE meeting finely balanced for the GBP. If the BoE fails to provide a strong signal that further is easing coming, it will open the door for the GBP to extend its recent advance. On the other hand any further encouragement from the BoE in favour of implementing negative rates could see recent GBP gains reverse sharply.”