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 two 25 bps hikes remain nearly fully priced. Our view is for only one further hike suggesting scope for yields to adjust lower.”

“We have held a bullish GBP bias since the start of the year but with inflation potentially now about to start undershooting BoE forecasts, our bias is now turning more neutral. The BoE may turn to faster balance sheet shrinkage as an offset as they move to a pause on lifting rates.” 

“GBP direction will continue to be dictated by policy divergence expectations and that could see GBP/USD underperforming further over the short-term.”