Downside to accelerate below 0.8472 – MUFG

Analysts at MUFG Bank, see a trade idea in shorting the EUR/GBP cross with a target at 0.8350 and a stop-loss at 0.8670. They point out the positive evolution of COVID-19 cases reinforces the bullish outlook for the pound. 

Key Quotes:

“We have been encouraged by recent positive COVID data from the UK suggesting that the risk of further pandemic related disruption to the UK economic recovery has diminished. The vaccine roll out and number of people who have already caught COVID should help dampen the severity of the current and any future COVID waves allowing the government to refrain from re-imposing significant restrictions. A strengthening economic recovery and building upside risks to their inflation target should keep pressure on the BoE to tighten exceptionally loose policy.”

“The policy divergence between the BoE and ECB should continue to widen as the ECB has signalled strongly it does not plan to raise rates even as the euro-zone economy is recovering more strongly and inflation is set to rise above target.”

“We expect GBP gains to accelerate against the EUR once the year to date low at 0.8472 is taken out.”

“The main risks to the trade idea include: i) a more intensified period of risk off trading hitting the GBP, ii) BoE provides dovish policy surprise, and iii) UK COVID cases pick up sharply again in response to recent re-opening measures. If the BoE sets a much lower threshold for starting quantitative tightening would dampen future rate hikes expectations.”

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