GBP/USD: A test of the 1.4000 level looks inevitable – MUFG

UK-EU trade risks may be receding, according to economists at MUFG Bank. Therefore, the outlook for the pound remains positive. On Tuesday, GBP/USD is standing out by advancing above 1.39 as the UK reported the lowest number of COVID-19 infections since October and the vaccination campaign continues at a rapid pace. 

Key quotes

“We continue to run a long GBP/USD trade idea. The grounds for this view is the notable shift in the UK rates market after the Bank of England effectively abandoned the idea of cutting rates into negative territory which has seen the short end of the rates market take out the risk of rates turning negative. The momentum in the rates market was further reinforced by the speed of the vaccine roll-out, with 23% of the population now vaccinated with at least one dose.”

“The risk of an escalation of friction on the border between the UK and the EU appears to be receding now with data from a logistics company, Transporeon reporting that the rejection rate for cargo shipped from France to the UK had fallen to its lowest level since the last week of November.”

“Of course this is not to say that additional frictions exist under this new trade agreement. They do, but normalising traffic flows at least would diminish the economic impact and reduce concerns both within government and within the BoE. It will only add to the likelihood that the window for monetary easing in the UK is closing and help provide further support for the pound.”

“A test of the 1.4000 level in GBP/USD looks inevitable now at this stage with the outlook remaining favourable for now.”