GBP/USD: Cautious over further near-term gains – MUFG

A lot of good news has been priced into the pound, according to analysts at MUFG Bank. They point out that a relatively fast vaccine roll out in the United Kingdom could result in a quicker exit from COVID-19 crisis and in a stronger pound, but they warn the optimistic outcome remains highly uncertain.

Key Quotes:

“The GBP has continued to strengthen against both the EUR and USD at the start of the New Year. Our GBP index against an equally-weighted basket of the EUR and USD has risen to around 1 standard deviation above the average over the last four years. It has now largely reversed sharp losses sustained early last year when the COVID shock first hit. The GBP is now testing key resistance levels against both the EUR and USD which if broken could lead to further near-term gains. A decisive break through the 1.3700-level would open the door for cable to make a run up to the 1.4000-level.”

“BoE rate cut expectations have been scaled back recently. Likelihood of further BoE easing as soon as in February has diminished. Weak PMIs signal though that more easing can’t be completely ruled out.”

“Relatively fast UK vaccine roll out could result in quicker exit from COVID crisis and stronger GBP. But optimistic outcome remains highly uncertain. Government’s strategy to delay second doses could backfire.”

“We believe that a lot of good news has been priced into the GBP recently. The GBP has derived support from the move higher in short-term UK rates, but they are unlikely to continue to move much higher in the near-term. It makes us cautious over chasing further near-term GBP gains.”