GBP/USD: Hawkish policy surprise from the BoE is required to fuel the pound – MUFG

The pound has regained some upward momentum on the back of building Bank of England (BoE) rate hike expectations but key resistance levels have not been broken. In the view of economists at MUFG Bank, there is a high hurdle for the BoE to provide a hawkish policy surprise which should help dampen further GBP upside in near-term. 

Cautious about chasing the GBP higher in the near-term

“We believe that there is greater risk of disappointment which could trigger a temporary correction lower for the GBP. We expect the BoE to mainly stick to the policy message from August when they formally adopted a gradual tightening bias.”

“We expect the BoE to acknowledge that Q3 GDP growth is likely to be weaker than expected (2.9%). There is more concern that supply constraints from Brexit and COVID-19 will place more of a dampener on the recovery.”

“The combination of slower growth and higher inflation creates a less favourable mix for the GBP, and with BoE rate hike expectations already well priced in for the next year. A stronger hawkish signal from the BoE will be required for the GBP to break through key resistance levels.”