Sell Pound To Euro Target 1.1495 On BoE Rate-Cut Signal: MUFG

At this week’s meeting, it expects that the Bank of England (BoE) will signal a rate cut for June which will undermine the Pound.

Although it also expects the ECB will also cut in June, markets are expecting this move while a BoE move would still be considered a surprise.

It also notes that the Pound is vulnerable on seasonal grounds with the currency tending to lose ground during May.

MUFG notes that the combination of recession firmly in the rear-view mirror and solid UK data had dampened expectations of a near-term BoE rate cut, especially with expectations of Federal Reserve rate cuts also being pushed back.

Markets expect a first rate cut to be delivered in August or September, but MUFG is sticking to its view for an earlier move even with internal divisions.

Sequencing will be important, and it expects that the BoE will lower inflation forecasts in this week’s inflation report which will pave the way for a rate cut in June.

MUFG does consider that increased confidence in the European outlook and support for high-yield currencies will protect the Pound from heavy selling.

Key Quotes:

“The GBP has been one of the best performing G10 currencies so far this year. After the USD, the GBP has been the second best performer.”

“Recent comments from MPC officials have indicated that more MPC members may join arch dove Swati Dinghra in voting for a rate cut.”

“A more dovish BoE policy update poses downside risks for the GBP in the week ahead.”

“The timing of emerging tightening liquidity conditions is somewhat surprising given that the BoE’s balance sheet remains relatively elevated.”

“Further evidence that the BoE is moving closer to cutting rates could trigger a weaker GBP moving it back towards the bottom of current trading ranges against the EUR and USD.”

“Historically the GBP has tended to underperform in the month of May most notably between 2010 and 2020 when cable declined for eleven consecutive calendar years, although performance has been more mixed in the years following the COVID shock.”