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A stronger USD over the past week has been helping to dampen further upside for cable beyond the 1.3700-level. The Bank of England (BoE) policy update will be important in determining if recent bullish trend for GBP extends further in the near-term. A more likely scenario in the view of economists at MUFG Bank. 

Key quotes

“Market participants have scaled back rate cut expectations ahead of the meeting which has helped to lift the GBP. The argument in favour of another imminent easing of monetary policy has been dampened by the last minute Brexit trade deal, resilience of the UK economy at the end of last year and relatively fast roll out of vaccines in the UK. However, the tougher third lockdown is expected to deliver a larger negative hit to growth at the start of this year. It could still encourage the BoE to provide more stimulus to act as insurance against downside risks even if they are more confident of a stronger recovery beyond.” 

“The BoE is expected to set out plans for the weekly pace of QE purchases for the rest of this year. The BoE could decide to speed up/front-load weekly purchases from around GBP4.4 billion a week at present to provide more support in the near-term. The BoE is also set to release the outcome of a consultation with lenders over the operational readiness for negative rates in the UK.” 

“The most bullish potential outcome for the GBP would be if the BoE leaves the key policy rate unchanged, and the consultation with lenders further dampens speculation over negative rates in the near-term. It could open the door to further GBP gains lifting cable closer to 1.4000 and EUR/GBP towards the mid-0.8000’s. 

“There are clear downside risks as well for the GBP. A rate cut to 0.00% or even into negative territory can’t be completely ruled out although appears less likely now.”