Bank of Tokyo-Mitsubishi: "The pound may continue to strengthen modestly in the near-term on the back of strengthening UK cyclical momentum. However, those gains are likely to prove limited and remain vulnerable both in the near-term and medium–term. In the near-term those gains could quickly reverse should the BoE choose to strengthen its forward rate guidance. One upcoming key event which poses some downside risk for the pound is on the 28th August when Governor Carney is next scheduled to speak. The combination of released pent up demand and favourable summer weather is also likely exaggerating investor expectations over the underlying pace of UK economic recovery likely in the years ahead. The pace of quarterly real GDP growth could reach a near-term peak in Q3 reaching close to 1.0%. Should the pace of growth then ease heading into year end it would likely take some upward pound momentum away.
In the medium-term with UK short rates likely to remain low in the year ahead once the current investor excitement cools down, recent pound strength is unlikely to prove unsustainable. A further steepening of the yield curve in the UK, which has historically weighed upon the pound, should help to keep the pound weak. With GBP/USD now approaching strong technical resistance between 1.5650 and 1.5750 from its 55 and 200-week moving averages, further upside from current levels in the near-term will prove increasingly difficult. EUR/GBP has also now fallen back to key support from its 200-week and daily moving averages at 0.8500 and 0.8450."