GBP/USD: Recovery but pound to underperform – MUFG

Analysts at MUFG Bank, are a little more pessimistic on the outlook for the pound given the extent of the hit from the coronavirus, the potential for a cautious reversal and the government’s stance not to extend the Brexit negotiation period.

Key Quotes:

“The pound under-performed through much of April, but rallied at month-end as the US dollar weakened more broadly. A marked jump in COVID-19 testing may have helped lift sentiment. The day-to-day COVID-19 data throughout April certainly point to the UK being potentially the worst hit country by the coronavirus in Europe with only the US globally being worse. That may now start to shape investor expectations over how the UK manages reversing the economic lockdowns going forward. We expect to hear details on this before the next review date of 7th May.”

“Crucial in determining investor sentiment and the performance of the pound will be managing the risks surrounding a 2nd wave of COVID-19. Three aspects will be important – the pace at which lockdowns will be reversed; the willingness to maintain the policy support for businesses and households; and the capacity to test quickly.”

“The OBR’s view on the lockdown provided it with a terribly weak estimate for GDP. A 35% plunge in Q2 would be followed by strong rebounds of +25% and +20% in Q3 and Q4 to give calendar year contraction of -13%. The MUFG House view is for a - 5% contraction.”

“Brexit negotiations could weigh on growth in H2 as well, by more than we assume, suggesting downside risks to our -5% GDP estimate.”

“We are a little more pessimistic on the outlook for GBP given the extent of the hit from COVID, the potential for a cautious reversal and the government’s stance not to extend the Brexit negotiation period. Our GBP appreciation profile is a little flatter.”