GBP/USD to advance nicely behind still dovish Fed and higher US inflation – MUFG

Optimism about the global recovery and ongoing support from the Fed outweigh virus and inflation concerns, leaving USD vulnerable in near-term. It has helped to lift cable back towards the year to date high of 1.4237 from 24th February. Economists at MUFG Bank, maintain a bullish GBP/USD stance as broad-based US dollar weakness has seen cable trade above the 1.4000-level for the longest period since April 2018.

Fed: Now is not the time to consider shifting policy

“Higher inflation is only US dollar positive if it prompts the Fed to bring forward monetary tightening plans and lifts US yields. But those initial hopes have been dampened for now by the dovish response from Fed officials in recent days. Overall, the comments reinforce the Fed’s dovish message that it remains too soon to even think about tapering QE at the current juncture. The combination of still loose Fed policy and higher US inflation leaves the US dollar vulnerable to further weakness in the near-term.”

“The pound has shown little reaction to the UK government’s recent concern over the spread of the new Indian COVID-19 variant in the UK. For now market participants remain optimistic that the UK economy will continue to rebound robustly this year by around 7%. 

“Today’s employment report revealed the first increase in employment (84K) since the pandemic began. It has been reassuring to hear reports that vaccines should still prove effective against the new variant. The UK’s more advanced vaccine roll out should help to dampen risks of further disruption.”

“Our bullish outlook for the pound is based on the assumption that the UK economy will bounce back strongly, so we will need to monitor the latest COVID-19 developments closely as they potentially pose downside risks.”