GBP/USD: Economic recovery as vaccination continues supports cable's momentum – CIBC

Economists at CIBC Capital Markets have upgraded the GBP forecast profile in the wake of UK negative rates being stricken from the policy agenda. GBP/USD is seen at 1.43 and 1.46 by the second and third quarter of the year, respectively.

Key quotes

“The combination of an upbeat Bank of England macro assessment predicated on an accelerated vaccine rollout, and the avoidance of a no-deal Brexit underlines that negative rate assumptions are not credible. Although we can expect policy inertia until H1 2023, the consequence of the removal of negative rate assumptions will be a steeper curve, as CPI heads back to target, while activity levels accelerate.” 

“Barring an exogenous shock to the UK vaccine strategy, as almost 30% of the adult population have been vaccinated, expect sterling to have moved into a new, higher paradigm.” 

“A period of excess demand, would under more normal circumstances encourage markets to price in higher administered rates. However, as GDP is set to remain below pre-covid levels into 2022, the underlying dynamics are far from normal. Still, a vaccine-inspired, consumer-led recovery from Q2 onwards, obviates the need for negative rate risks, so the prospect of higher inflation and accelerating growth supports a stronger performance in trade-weighted sterling.”