Pound-Dollar Rate: MUFG Raise Forecast Now Delta is in Retreat

- Pound-Dollar forecast updated at MUFG
- GBP to benefit from falling Covid cases
- Says UK approaching 'herd immunity'

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• GBP/USD reference rates at publication:
• Spot: 1.3923
• Bank transfers (indicative guide): 1.3536-1.3633
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Analysts at investment bank MUFG have raised their forecasts for the British Pound in light of a sustained fall in UK Covid-19 cases which they say will ultimately allow the Bank of England to raise interest rates in 2022.

In a regular monthly currency forecast update MUFG analysts eye the Pound-to-Dollar exchange rate (GBP/USD) returning above 1.40 in the final quarter of the year, helped by the UK's attainment of something resembling Covid-19 'herd immunity'.

The call comes amidst a short-term appreciation in Pound Sterling valuations against the Dollar, with GBP/USD recovering from 1.3572 on 20th July to around 1.39 at the present time.

"The GBP’s impressive performance stands out as other high beta currencies have not performed as well amidst more challenging conditions for risk assets in the near-term reflecting ongoing concerns over slowing global growth and tightening liquidity conditions," says Lee Hardman, Currency Analyst with MUFG in London.

"The recent outperformance of the GBP reflects building optimism that the COVID pandemic “could largely be over by late September/October” in the UK," he adds.

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"We believe the primary factor here is the evidence in the daily COVID infection rates that indicate the UK may be approaching ‘herd immunity’ that may confirm the template for emerging from the COVID pandemic on a more permanent basis," says Hardman.

The rolling seven day average of new Covid-19 cases in the UK has fallen to 382/million people, down from a peak of 702/million on July 21 which was just two days after England lifted all remaining restrictions.

Concerning the outlook, MUFG says currency markets might have not yet fully responded to this positive development as nearly a million people have been told to self-isolate having been "pinged" by the NHS app, while mobility appears to have stalled according to high frequency data.

Upside potential for economic growth therefore lies with the consumers and businesses rediscovering some of that confidence lost to the third wave.

If caution was prompted by watching rising cases it stands that increased confidence could follow falling rates.

"We have adjusted our GBP profile modestly higher reflecting our belief that the recent data is meaningful and the implications are not yet fully priced into the market," says Hardman.

MUFG forecast a range for GBP/USD of between 1.3700 and 1.4600 in the fourth quarter of 2021, with a point forecast set at 1.44.

The range expands to 1.3700-1.4700 in the first quarter of 2022 with a point forecast set at 1.4290.

The highlight for the Pound in the near-term will be the August 05 policy update and Monetary Policy Report at the Bank of England, an event MUFG expects to confirm a rate rise at the Bank will occur towards August 2022.

Hardman says the BoE meeting will allow policy makers to endorse current money market rates (that currently price a rate hike for August 2022).

"The favourable macro backdrop helped by the early evidence of being in the final stage of the pandemic will likely be illustrated in the BoE’s updated MPR that will suggest a 2022 rate hike, which we see as GBP supportive from here," says Hardman.

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