GBP/USD: Vulnerable to further near-term weakness if equity market weakness extends – MUFG

Unfavourable equity market developments have taken away some of the support for the pound from the ongoing hawkish repricing of Bank of England (BoE) rate hike expectations. Economists at MUFG Bank expect the GBP to remain depressed if equity markets continue suffering losses.

Equity weakness hits pound even as BoE moves closer to another hike

“The 30-day correlation between daily % changes in cable and the MSCI’s ACWI equity index has risen back up to +0.65 from a recent low of +0.12 on 10th December. It has been the strongest sustained period of positive correlation between cable and global equity market performance since 2013, and highlights that the pound is vulnerable to further near-term weakness if equity market weakness extends.”

“The BoE is likely to raise rates again at their next meeting on 3rd February backed up as well by last week’s inflation and labour market reports from the UK. The recent earlier than expected rolling back of Plan B COVID-19 restrictions should further help to ease downside risks to growth at the start of this year.”

“The week ahead could prove important for the future of Prime Minster Boris Johnson ahead of the release of the much anticipated internal investigation into ‘partygate’. We do not expect heightened political uncertainty to materially impact pound performance given there is unlikely to be any near-term change in government policies.”