GBP - FUNDAMENTAL DRIVERS
Fundamental bias: Strong bullish
1. Virus Situation
Regarding the UK's coronavirus outlook, this remains encouraging with the UK's vaccine program having administered at least one dose to over half of the UK population. Given the current success of its vaccine program, the UK is now in the early stages of lifting lockdown restrictions. While the UK's coronavirus outlook is improving, we expect GBP to remain well supported. The biggest risk to this view is the current challenges regarding the AstraZeneca vaccine, which the UK is very reliant upon to reach their vaccination targets.
2. The Monetary Policy outlook for the BOE
From the start of the year the BOE had a change of heart regarding negative interest rates when on the 12th of Jan Governor Bailey pushed back against negative rates, and that view was confirmed in the BOE’s meeting on the 4th of February where they firmly pushed back against negative rates. Even though the BOE is nowhere close to hawkish, their less dovish demeanour regarding the overall economic outlook (and unphased approach to rising yields) have seen markets shifting their monetary policy expectations from expecting the next move to be a 10 bsp cut to now expecting the next move to be a hike of 10 bsp. The most recent BOE meeting wasn’t as hawkish as markets were hoping for, but we did see the bank make some substantial upgrades to the economic outlook and confirms that the bank is moving further away from ultra-easy policy and gradually towards normalization. The market showed their predisposition after the strong reaction from BOE’s Vlieghe this past week after he noted that there is a likelihood for earlier hikes in the cash rate if the economy progresses in line with their estimates. The comments were very conditional and also came from a member who is leaving in August, but the hawkish reaction from the market shows their inclination that the BOE is the next in line for a hawkish tilt.
3. The country’s economic developments
The hopes of a possible faster economic reopening and subsequent recovery has seen both the BOE and IMF upgrade growth projections for the UK economy which has widened the growth differentials between other majors by quite a bit and is something that should continue to be a supportive factor for GBP. Due to the continued improvement in economic data as the reopening accelerates, we have updated out Fundamental bias for Sterling from Bullish to Strong Bullish. It is true though that a lot of the positive surrounding the UK’s economic recovery should already be reflected in the price, but as long as the data continues to surprise to the upside the trend should be supportive for the GBP as it should provide further support for policy normalization from the BOE.
1. Virus Situation
Regarding the UK's coronavirus outlook, this remains encouraging with the UK's vaccine program having administered at least one dose to over half of the UK population. Given the current success of its vaccine program, the UK is now in the early stages of lifting lockdown restrictions. While the UK's coronavirus outlook is improving, we expect GBP to remain well supported. The biggest risk to this view is the current challenges regarding the AstraZeneca vaccine, which the UK is very reliant upon to reach their vaccination targets.
2. The Monetary Policy outlook for the BOE
From the start of the year the BOE had a change of heart regarding negative interest rates when on the 12th of Jan Governor Bailey pushed back against negative rates, and that view was confirmed in the BOE’s meeting on the 4th of February where they firmly pushed back against negative rates. Even though the BOE is nowhere close to hawkish, their less dovish demeanour regarding the overall economic outlook (and unphased approach to rising yields) have seen markets shifting their monetary policy expectations from expecting the next move to be a 10 bsp cut to now expecting the next move to be a hike of 10 bsp. The most recent BOE meeting wasn’t as hawkish as markets were hoping for, but we did see the bank make some substantial upgrades to the economic outlook and confirms that the bank is moving further away from ultra-easy policy and gradually towards normalization. The market showed their predisposition after the strong reaction from BOE’s Vlieghe this past week after he noted that there is a likelihood for earlier hikes in the cash rate if the economy progresses in line with their estimates. The comments were very conditional and also came from a member who is leaving in August, but the hawkish reaction from the market shows their inclination that the BOE is the next in line for a hawkish tilt.
3. The country’s economic developments
The hopes of a possible faster economic reopening and subsequent recovery has seen both the BOE and IMF upgrade growth projections for the UK economy which has widened the growth differentials between other majors by quite a bit and is something that should continue to be a supportive factor for GBP. Due to the continued improvement in economic data as the reopening accelerates, we have updated out Fundamental bias for Sterling from Bullish to Strong Bullish. It is true though that a lot of the positive surrounding the UK’s economic recovery should already be reflected in the price, but as long as the data continues to surprise to the upside the trend should be supportive for the GBP as it should provide further support for policy normalization from the BOE.
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