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The pound lagged in April after being the second best performing G10 currency in Q1 but GBP gains have picked up again and the pound is currently the best performing G10 currency in May. On Thursday, GBP/USD jumped 50 pips after Gertjan Vlieghe, a member of the Bank of England, hinted at a rate hike in early 2022. Nonetheless, economists at MUFG Bank expect cable to suffer some downside pressure in the short-term.

Next stage of the reopening remains in doubt due to the spread of the COVID-19 Indian variant  

“MPC member Gertjan Vleighe mentioned the scenario of an earlier than expected rate hike by the BoE. The speech was a detailed and interesting look at what bond yields are telling us about investor expectations and concluded with three key scenarios – the central one being similar to the MPC’s central projection outlined in the May MPR. However, Vleighe does make reference to a rate hike ‘well into next year’ under the central scenario which is not what was indicated by the OIS curve used by the BoE – the first rate hike is fully incorporated not until Q1-Q2 2023.”

“The prospect of a rate hike by Q2 2022 presents a lot of ‘ifs and buts’ with this scenario that suggest this bounce in GBP could easily correct.”

“Still, the GBP/USD reaction does indicate where the greater sensitivity to risks lie, which makes sense given the lockdown reversal in the UK could produce a more vigorous near-term burst of growth relative to Europe or the US.”

“While we have a bullish view on the pound, the catalyst for this bounce yesterday may not be sustained. We also need to monitor the very near-term risk of the Indian variant of COVID-19 potentially derailing the full reversal from lockdown scheduled for 21st June. We could well see some reversal of GBP gains over the short-term.”