Despite the broad-based slide of the US dollar on Wednesday following the US CPI, analysts at Rabobank still see the GBP/USD vulnerable to the downside and warn it could drop back again under 1.20 on a one to three-month view. 

Key Quotes: 

“Last week the market was taken by surprise by the candid tone adopted by the BoE in its warnings about the UK economic outlook.  The Bank forecast that the economy would fall into a 15 month recession starting in Q4 this year and that GDP would drop a little over 2 ppt from peak to trough in a downturn similar to the one experienced in the early 1990s.  While it was a surprise to hear the Bank speak in such frank terms, the fact that the UK growth outlook is poor was not a total shock.”

“Although fresh UK economic data has been limited so far this week, there has been plenty of evidence illustrating the precarious position of the UK economy. Bloomberg news is reporting that the UK government is preparing for the possibility of energy blackouts in the forthcoming winter. Additionally, estimates are circulating that average household annual energy bills could rise to over £4000 in the new year.  Since the average salary for full-time UK workers is around £38,400, this could have a devasting impact on consumer demand.”

“The USD has softened in the wake of today’s US CPI inflation report.  However, we retain the view that the pound remains vulnerable vs. the USD and see risk of another break below the 1.20 level on a 1 to 3 month view.  In our view, GBP has a better chance of holding its ground vs. the EUR into the winter, given the energy crisis currently facing the Eurozone.”
 

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