GBP/USD: Bearish fundamentals remain in place but selloff overdone – MUFG

Analysts at MUFG Bank, point out the GBP/USD pair has weakened sharply after breaking below the 1.3000-level. They consider the pound became deeply oversold and weakness has overshot short-term fundamental drivers increasing the likelihood of a temporary relief rally.

Key Quotes:

“Unsurprisingly technical indicators are signalling that the GBP is now heavily oversold against the USD in the near -term which increases the likelihood of a temporary relief rally. The 14-day RSI has reached its low est level since March 2020. At the same time, our short-term regression model is signalling that cable has overshot fundamental drivers to the downside.”

“In light of the building risks for a sharper slow down for the UK economy as the cost of living crisis takes more of a toll on activity, we expect the BoE to maintain a more cautious outlook over the need for further tightening as it finely balances upside risks to inflation against downside risks to growth when setting policy. It should favour the BoE sticking to smaller 25bps hikes at upcoming policy meetings. The UK rate market is pricing in 25bps hikes at all six remaining MPC meetings this year. GBP weakness w ould be reinforced if the BoE signals that rate hikes could be paused sooner in response to weaker growth.”

“The fundamental outlook continues to favour further GBP weakness. A cautious message from the BoE should support a weaker GBP in the week ahead. The main risk is that the GBP is already heavily oversold.”