During June the pound weakened against the US dollar from 1.4189 to 1.3812. Nonetheless, economists at MUFG Bank maintain a strong GBP profile following BoE upgrades but warrants caution ahead of ending furlough scheme.
Rising COVID-19 cases could alter the path to sterling appreaciation
“We remain bullish over the forecast horizon on the pound but given the USD upgrades to forecasts, more of our bullish view is now reflected versus EUR compared to a month ago.”
“We are also more mindful of COVID-19 risks than a month ago with 26,068 cases reported on 30th June – the highest total since January. The Delta variant is driving the spread. While it looks increasingly likely that the UK government under new Health Secretary Sajid Javid will end restrictions on 19th July given low hospitalisations and deaths, increased infections could impair households' willingness to return to normal.”
“We believe the message in August will either endorse higher market rates rather than suggest further rises may be required to meet the 2% inflation target. A message of higher market rates being required will only come once the MPC has a good insight into the unwind of the Job Retention Scheme.”
“ONS data indicated around 1.5mn workers remained furloughed in June. The scheme will begin to wind down from July and end in September. If disruption is limited, we believe the BoE will be in a much more confident position to signal to the markets a more dramatic shift in guidance. A rate increase is about 75% priced by the end of 2022 and if the Job Retention Scheme ends relatively smoothly, rates will have moved further higher and the BoE would then be in a position by November to at least endorse the higher market rates. That scenario should result in support for the pound and hence why we maintain a gradual appreciation profile.”
“The risk to our view is that the furlough scheme does not go as well which would imply weaker GBP levels than we currently forecast.”
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