GBP/USD: Depth of UK recession highlights challenges ahead for the pound – MUFG

The pound corrected modestly lower following the release of yesterday’s UK GDP report for Q2. EUR/GBP moved back above the 0.90 level and hit an intraday high of 0.9053 while cable fell back within touching distance of the 1.30 level. Economists at MUFG Bank foresee a bumpy road ahead for sterling.

Key quotes

“The GDP report confirmed that the UK economy has been one of the hardest hit by the negative COVID shock as it contracted by a record -20.4% in Q2. It was marginally better than the BoE’s forecast for a contraction of -21% although that provides little comfort. More encouraging was the stronger than expected recovery in recent months. The latest monthly GDP report revealed that activity started to rebound more robustly by 8.7% in June following an upwardly revised expansion of 2.4% in May. It still leaves the level of GDP 17.2% below its pre-COVID peak.”

“Lockdown measures remained in place for longer in the UK than in many advanced economies, but have eased back more notably in recent months which should support a strong rebound in Q3. However, the expected lagged deterioration in the labour market when the job furlough scheme ends and uncertainty over the path of the virus mean that the recovery will be uneven and protracted.” 

“In addition, the risk of further Brexit uncertainty poses downside risks to the recovery later this year. In these circumstances, we continue to maintain a cautious outlook for the pound even after the BoE’s decision to dampen negative rate expectations which has helped ease downside risks in the near-term.”