GBP/USD: Upside risks for the pound are clear – MUFG

Analysts at MUFG Bank, consider that the recent information provided by the Bank of England (BoE) and the continued vaccination roll-outs as strengthening the case for further GBP upside over the short-term

Key Quotes:

“The pound is the best performing G10 currency versus the US dollar this year in part helped by the response to yesterday’s BoE announcements that were certainly on the more optimistic side of expectations. The message from the BoE was effective that the national lockdown that began on 4th January and will slowly start to be reversed from 8th March will have no impact on the outlook for the economy further out. The reasoning is that the weaker than expected Q1 GDP due to the current lockdown will be offset by the stronger than expected Q4 2020 GDP and a more vigorous recovery from Q2 onwards. All told the economy will still have recouped COVID GDP losses by Q1 2022.”

“Within weeks we are likely to see a dramatic fall in hospitalisations and deaths from COVID. The markets may be under-estimating the scale of improvement that appears around the corner that will notably lift investor confidence.”

“Like with negative rates, the MPC did not wish any action to be determined as a sign of future policy direction but with this decision it seems reasonable to interpret this as a higher level of discomfort running such a sizeable balance sheet and will likely raise expectations of a sooner run-down of Gilts held by the BoE.”