EUR/GBP: Bullish outlook for the pound supported by COVID data and monetary policy divergence – MUFG

Bearish risks continue to prevail in the EUR/GBP according to analysts at MUFG Bank. They hold the idea of shorting the cross with a target at 0.8320. They consider that positive developments regarding COVID reinforces the bullish outlook for the pound.  

Key Quotes:

“We are maintaining a short EUR/GBP trade idea to reflecting building confidence in our bullish outlook for the GBP. We have been encouraged by recent positive COVID data from the UK suggesting that the risk of further pandemic related disruption to the UK economic recovery has diminished. The vaccine roll out and number of people who have already caught COVID should help dampen the severity of the current and any future COVID waves allowing the government to refrain from re-imposing significant restrictions.”

“The case for a stronger pound has been reinforced after the BoE took another step closer to tightening policy at their latest MPC meeting. It has further encouraged market participants to price in more rate hikes into next year, although the reduction in the Bank rate threshold to begin reducing the size of their balance sheet to 0.50% has helped dampen rate hike expectations further into the future.”

“Policy divergence between the BoE and ECB should continue to widen as the ECB has signalled strongly it does not plan to raise rates even as the euro-zone economy is recovering more strongly and inflation is set to rise above target. The main risks to the trade idea include: i) a more intensified period of risk off trading hitting the GBP, and ii) UK COVID cases pick up sharply again in response to recent re-opening measures.”