GBP/USD: the Bank of England meeting is an obstacle to the continuation of the rally in GBP – - MUFG

31.07.2020 22:04
Analysts from MUFG Bank warn against following the growth of the pound before the key event risk, which is the Bank of England's monetary policy meeting, and in conditions when the GBP/USD pair becomes significantly overbought against the USD:

"The GBP has become heavily overbought against the USD, which suggests caution in continuing to pursue the growth of the GBP/USD in the short term. However, the recent performance of the GBP on a trade-weighted basis was less impressive, as it remains about 1.7% lower than at the end of April.

Market participants will be closely watching the upcoming Bank of England monetary policy meeting on Thursday, in search of a new catalyst for the GBP. The Bank of England is expected to keep its monetary policy stance unchanged, after it just expanded its "quantitative easing" program by 100 billion pounds at a meeting in June.
More important for the GBP indicators will be any clarification of the likely monetary easing later this year, which may include another increase in" quantitative easing " and/or lower (negative) interest rates.

We still expect the Bank of England to be cautious about the very uncertain economic Outlook, given the risks of further disruption due to the second wave of COVID, and the risk of another hit to economic growth later this year when the employee leave scheme ends in the autumn.

We believe that the Bank of England will provide additional monetary policy incentives in November. This leaves the upcoming Bank of England meeting fairly balanced for the GBP. If the Bank of England fails to give a strong signal that policy easing is coming in the future, this will open the way for the GBP to continue its recent growth. On the other hand, any further encouragement to apply negative interest rates could lead to a sharp reversal of the recent growth in the GBP."

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