GBP/USD: Four reasons to be cautious on short-term sterling upside – MUFG

The pound is the third-best performing G10 currency this week. However, there are factors that should make market participants a little more cautious over the short-term, economists at MUFG Bank report.

UK GDP remains 2.5ppts below the pre-covid peak after weak July data

“The GDP data for July was weaker than expected, expanding just 0.1% MoM – weaker than the 0.5% gain expected. Service-facing services remain 6.7ppts below the pre-COVID peak despite overall GDP being down just 2.5ppts. All other services activity is just 0.9ppts below the pre-COVID peak.”

“The ONS released its updated estimate for the number of people on furlough which was estimated to be between 1.4-1.8mn. This tallied with other tax data that implied 1.6mn people were on furlough on 31st July. The data indicates little improvement and a clear slowdown in the pace of people coming off furlough in recent months.”

“The announcement of a National Insurance Contribution increase of 1.25% for employers and employees will see the fiscal backdrop become more of a drag on growth as support measures come to an end.” 

“Governor Bailey mentioned that the new BoE guidance implied that the conditions for a rate that are now believed to be in place were necessary but not sufficient for a rate hike given the ongoing uncertainty. So we would expect limited further upside on rate hike expectations for now which could take out some of the upside momentum for the pound.”