Synopsis:

MUFG highlights the importance of this week’s UK economic data for the British pound (GBP) and the Bank of England's (BoE) rate outlook. They note that the pound is recovering as global investor risk sentiment improves and that upcoming UK data will be crucial in determining the BoE's next steps.

Key Points:

1. GBP Recovery:

   • The pound is regaining ground against both the euro (EUR/GBP) and the US dollar (GBP/USD) as global risk sentiment improves.
   • EUR/GBP has fallen below the 200-day moving average, around 0.8560, while GBP/USD is approaching the 1.2800 level after finding support at 1.2660.

2. Impact of Financial Market Volatility:

   • The recent sell-off in the pound, particularly against the euro, marked the most significant correction since last autumn/winter.
   • Financial market volatility impacted high-yielding carry currencies like the pound, but with market conditions stabilizing, the GBP is starting to recover.

3. BoE Rate Outlook:

   • While the BoE began cutting rates this month, MUFG suggests that this was not the primary driver of the pound’s recent weakness.
   • The UK rate market anticipates a more gradual rate-cutting cycle from the BoE compared to the Fed and ECB, with 100bps of cuts priced in over the next year, versus 175bps for the Fed and 125-150bps for the ECB.

4. Critical UK Economic Data:

   • The upcoming UK labor market report (Tuesday), CPI report for July (Wednesday), and Q2 GDP report (Thursday) are pivotal for the BoE’s assessment of inflation risks.
   • Stronger-than-expected data could reduce expectations for a September rate cut and support further GBP gains if financial markets continue to stabilize.

Conclusion:

MUFG underscores the importance of this week’s UK economic data in shaping the BoE’s rate outlook and the pound's performance. Should the data alleviate concerns about persistent inflation, the GBP could continue its recovery, particularly if financial market stability is maintained.