GBP/USD: Outlook for pound worsening – MUFG

Analysts at MUFG Bank point out the pound is set to be more influenced by domestic factors. They see rising prospects of negative interest rates from the Bank of England, as the central bank appears reluctant to continue with QE.

Key Quotes:

“We continue to see the pound as vulnerable to the ongoing gradual building of expectations of negative interest rates being adopted in the UK. The 5-year Gilt yield record low of -0.094% was threatened yesterday with the economic data this week failing to shift these building expectations. The GBP was the 2nd worst performing G10 currency in Q2 (JPY worst) and if NOK continues to rally, GBP will soon be the worst on a year-to-date basis. We don’t see this reversing. Incoherent government policy on COVID, the 2nd worst COVID death rate by population in the world, high frequency data that indicates a more subdued recovery, a budget deficit profile that is worse than most other major economies and rising Brexit uncertainties all point to GBP being singled out as higher risk than most other G10 currencies.”

“GBP remains strongly correlated to risk (with S&P 500; +0.54 – 3rd strongest in G10) which points to global influences supporting GBP – we would expect a more domestic influence ahead, which points to the potential for renewed depreciation.”