GBP/USD: Positive COVID-19 developments reinforce bullish sterling outlook – MUFG

GBP/USD is trading around 1.39, as UK cases continue falling from their highs. Subsequently, economists at MUFG Bank are more confident in their bullish outlook for the pound.

Increased confidence in bullish outlook for GBP

“The recent outperformance of the GBP reflects building optimism that the COVID-19 pandemic ‘could largely be over by late September/October’ in the UK. If cases continue to rise less than feared, it will reinforce confidence that restrictions are unlikely to be tightened significantly again allowing the UK economy to continue rebounding strongly during the 2H 2021.”

“In the week ahead market participants will be watching closely to see if the Bank of England provides a hawkish policy signal to reinforce the GBP’s upward momentum. We are not expecting the BoE to announce it will end QE sooner than in December, but there is scope to further slow the pace of weekly purchases. At the same time, we expect the BoE to endorse current market pricing for a rate hike by next summer by showing inflation at or around target in 2-3 years’ time with upside risks.” 

“We have become more confident in our bullish GBP outlook. While there is a risk that the BoE could disappoint hawkish expectations this week, any GBP weakness should be temporary.”