GBP/USD: Pound underperformance unlikely to persist – MUFG

Analysts at MUFG Bank see potential in GBP over the next quarters, with the underperformance unlikely to persist. They forecast GBP/USD at 1.3720 by the end of the third quarter and at 1.4040 by the fourth quarter, and EUR/GBP at 0.8550 by the end of the year and at 0.8400 by the first quarter of next year. 

Key Quotes:

“The US dollar advanced versus most G10 currencies in August (apart from NOK & NZD) with sentiment hit by Delta variant concerns that has raised some doubts over the global recovery and the prospect of certain G10 central banks raising rates ahead of the Federal Reserve. In fact, the pound was the 2nd worst performing G10 currency in August on fears that supply constraint issues related not just to the pandemic but also to Brexit may curtail the extent of economic rebound going forward.”

“But what followed the BoE meeting was data pointing to greater supply constraint problems that could be viewed as reinforcing higher inflation risks but also lifting risks to the economic growth outlook. Growth concerns are the focus when the global backdrop is worsening, while the BoE’s QE unwind plan once rates hit 0.50% could mean less onus for higher rates over the medium-term. This led to the 10-year yield rising less than in the US which could weigh on GBP performance. Ultimately, greater supply constraints we believe would mean higher inflation and that would force the BoE to be more active in reversing policy which we believe over the forecast period at least would be GBP supportive.”

“The GBP being the laggard in G10 does not make sense to us and we see the outlook as more favourable for a GBP rebound. Given Brexit issues appear to be impacting labour supply, higher inflation risks will require the BoE to be more active which should see the GBP gain, but more versus the EUR than the USD.”