The pound fell from 1.4189 to 1.3812 versus the US dollar in June. Nonetheless, MUFG Bank economists maintain a solid GBP profile following BoE improvements, but prudence is advised ahead of the end of the furlough plan.
“We remain bullish on the pound over the forecast horizon, but given the USD upgrades to estimates, more of our bullish view versus EUR is now represented than a month ago.”
“With 26,068 instances reported on June 30th, the largest total since January, we are also more aware of COVID-19 hazards than we were a month ago. The spread is being driven by the Delta variation. While it appears increasingly likely that the UK government, led by new Health Secretary Sajid Javid, will lift restrictions on July 19th due to low hospitalizations and deaths, higher illnesses may make it difficult for homes to return to normal.”
“We expect the August message will either support higher market rates or signal that more increases may be required to attain the 2% inflation objective. The MPC will only send a message about the need for higher market rates after it has a thorough understanding of the Job Retention Scheme’s unraveling.”
“According to the ONS, over 1.5 million workers were still furloughed in June. The initiative will be phased out starting in July and will be completed in September. If the disruption is kept to a minimum, we believe the Bank of England will be considerably more confident in signaling a more drastic shift in direction to the markets. By the end of 2022, a rate hike is priced at around 75%, and if the Job Retention Scheme finishes smoothly, rates will have risen much more, putting the BoE in a position to at least support higher market rates by November. As a result of this scenario, the pound should gain support, which is why we retain a steady appreciation profile.”
“The risk to our position is if the furlough scheme fails, implying weaker GBP values than we now estimate.”/n
