GBP/USD: Continued grind toward the 1.20 level looks likely – MUFG

GBP/USD plunged to its lowest level since July 2020 after Bank of England’s (BoE) gloomy economic outlook. Economists at MUFG Bank believe that cable could extend its slump to the 1.20 level.

Grim outlook from the BoE

“We think the terribly grim GDP forecasts going forward (-0.25% in 2023) are a strong signal that the scope for sustaining monetary tightening is quickly diminishing. With the BoE’s inflation forecast in 3yrs time under an assumption of no further monetary tightening at just 2.16%, barely above the 2% target, there is a clear signal in the forecast that the BoE is close to a pause.”

“The sharp equity market selloff and a clear day of risk-off as financial market conditions continue to tighten is not a favourable backdrop for GBP and a continued grind toward the 1.20 level looks likely.”

“The political outlook for the UK could be about to worsen. Results are slowly beginning to come in for the Local elections that took place yesterday and as expected the results at this early stage do not look good for the government. The results won’t force PM Johnson out but will likely weaken his position further and leaves him vulnerable to party dissatisfaction that could create instability and uncertainty into the autumn. How badly the Tories do outside of London more generally will be key.”