UK inflation will be in focus this week and MUFG Bank’s GBP bias has turned more neutral too given scope for lower inflation than the BoE expects.
UK inflation should now start offering BoE scope for pause
“The OIS market indicates that the two 25 bps hikes remain almost fully priced. Our outlook is for just one more hike which suggests scope for lower yield adjustments.
“We have maintained a GBP bias since the start of the year but with inflation potentially starting to undershoot the BoE forecast, our bias is now becoming more neutral. The BoE may shrink the balance sheet quickly as an offset when they pause on rate hikes.”
“GBP policy deviations will continue to be dictated by expectations and this could further underperform GBP/USD in the short term.”
