GBP/USD: Upside risks relative to BoE expectations, sterling's gains to persist – MUFG

After underperforming in April, the pound bounced back in May and was the top performing G10 currency. Looking ahead, economists at MUFG Bank see continued GBP support and, therefore, expect the pound to extend its recent gains.

BoE’s dovish message on rates unlikely to last

“While the post-COVID rebound is happening in all major economies, we see potential for a more vigorous initial recovery phase in the UK given the restrictions in the UK were generally more severe than elsewhere.”

“The monetary policy outlook should certainly be more supportive going forward. The BoE’s confidence in the recovery was clear to see from the upgrade to the real GDP forecast for this year, from 5.0% to 7.25%. Despite the BoE upgrade, the inflation projections in two and three years’ time were actually slightly below target. The move higher in market rates was therefore deemed to be too large – a dovish message that has helped contain market rates. We doubt that impact can last and see a gradual move further higher in yields that will provide additional support for the pound.”

“The financial markets appear much better priced now for the economic rebound that is unfolding. Where we do still see some scope for upside surprise is in the UK and hence we maintain a view of GBP appreciation going forward.”