Downside risks for GBP/USD to the 1.10 zone in the next few months – Scotiabank

How low can the pound go? The GBP/USD pair could dive as low as 1.10, in the opinion of economists at Scotiabank.

GBP will not react well to renewed equity market weakness 

“Beyond the stagflation risk, the GBP will not react well to renewed equity market weakness as central banks persist with interest rate increases while the domestic political backdrop remains unhelpful (a new PM, Brexit issues unresolved and independence movements at home stirring again).” 

“The broad, trade-weighted index (TWI) measure of the pound could fall another 4-5% broadly or so before reaching the lows seen around the 1992 Exchange Rate Mechanism debacle, the 2008 financial crisis, the 2016 Brexit vote and the 2020 pandemic. The fact that broad TWI losses stalled around 73.5 on each of those very different calamities for the pound suggests it is a point worth keeping a close eye on moving forward. A return to that point in this cycle might imply – roughly – downside risks for GBP/USD to the 1.10 zone and upside risks for EUR/GBP to the 0.90 area in the next few months.”