Synopsis:

MUFG assesses the recent sharp rise in GBP/USD, attributed to contrasting PMI data between the UK/Euro-zone and the US. Despite the largest one-day gain since December 14, MUFG remains cautious about the sustainability of this upward movement due to potential BoE policy actions and broader economic factors.

Key Points:

• Strong PMI Data in Europe: The latest PMI data revealed a significant contrast between the UK and the Euro-zone's robust performance and the weaker figures from the US. This disparity has notably favored the GBP, contributing to a substantial 0.8% increase in GBP/USD—the biggest one-day gain since December 14.

• Impact of US Data: The unexpected weakness in US data, following a period of relatively stronger figures, has played a critical role in the recent GBP/USD rally, challenging the previous dominance of the US dollar in currency markets.

• Bank of England's Potential Rate Cut: While the June rate cut by the Bank of England (BoE) remains on the table, MUFG expresses skepticism regarding the continuation of the recent bullish momentum for the GBP. The possibility of a rate cut could temper expectations for further gains.

• European Growth and US Dollar Buying: The observed pick-up in growth within Europe is likely to act as a buffer against aggressive US dollar buying, particularly at stronger levels. Even modest improvements in European economic growth could help limit the appreciation of the dollar going forward.

Conclusion:

While recent PMI data has provided significant support to GBP/USD, leading to its biggest one-day gain in months, MUFG advises caution moving forward. The potential for a BoE rate cut in June and the evolving economic landscape in Europe may influence the trajectory of GBP/USD.