GBP/USD: Fundamental outlook continues to favour further sterling weakness – MUFG

The GBP has weakened sharply over the past week after cable broke below support at the 1.30 level. Will the Bank of England policy update reinforce case for a weaker GBP? In the view of economists at MUFG Bank, GBP weakness would be reinforced if the BoE signals that rate hikes could be paused sooner in response to weaker growth. 

A cautious message from the BoE should support a weaker GBP

“Unsurprisingly technical indicators are signalling that the GBP is now heavily oversold against the USD in the near-term which increases the likelihood of a temporary relief rally.”

“There appears to be little to no light at the end of tunnel for the Ukraine conflict keeping risks titled to the downside for the UK economy and GBP.”

“We expect the BoE to maintain a more cautious outlook over the need for further tightening as it finely balances upside risks to inflation against downside risks to growth when setting policy. GBP weakness would be reinforced if the BoE signals that rate hikes could be paused sooner in response to weaker growth.”

“The GBP could face further selling pressure following local elections scheduled later this week on 5th May. If the Conservative party performs even more poorly than expected, the results will increase the likelihood that Prime Minister Boris Johnson faces a vote of no confidence. A pick up in political uncertainty would add to current bearish sentiment towards the GBP.”