According to analysts from Rabobank, if the Bank of England (BoE) do not keep step with the hawkish guidance of the Federal Reserve (Fed) there is a risk that the pound could weaken further. They see the risk of dips in the GBP/USD pair to 1.18 on a three-month view.
“In recent sessions, the market has started to switch its focus to the risks of a deteriorating growth outlook in the US. Various economic indicators suggest that the economy may already have slowed. The UK slowdown is more advanced, with the cost of living crisis having been evident for months. Arguably the challenges facing policymakers in the UK are among the most complex in the developed world. UK CPI inflation has not yet peaked, and labor market strife indicates that higher inflation expectations may already be entrenched. However, UK consumer confidence has plunged, and, more recently, measures of business sentiment have also started to dive.”
“If expectations regarding BoE policy moves do not keep step with the hawkish guidance of the Federal Reserve, it can be argued there is a risk that GBP could weaken further. Yet, GBP is also proving sensitive to fears regarding growth. We see risk of dips to GBP/USD 1.18 on a 3 month view. We expect EUR/GBP to end the year at 0.88.
“The BoE was out of the traps much earlier than either the Fed or the ECB in terms of policy tightening. However, this has failed to give the pound much of a lift, with GBP one of the poorer performing G10 currencies in the year to date. In our view, the inability of GBP to benefit substantially from the BoE’s early rate hiking cycle is due to the market’s focus on the poor growth outlook for the UK.”