GBP/USD: Strength of BoE pushback against higher rates hits the pound – MUFG

The pound has continued to trade at weaker levels following yesterday’s dovish Bank of England (BoE) policy surprise which triggered a sharp repricing of rate hike expectations for the coming years. Economists at MUFG Bank expect the GBP to suffer further downside motion if the “Old Lady” fails to respond to higher inflation.

Real yields pose downside risk for the GBP

“On balance, we expect that the BoE will feel comfortable to raise rates as soon as at their next policy meeting in December although there is a risk it waits a little longer until February.”

“We still believe that the BoE will raise the policy rates closer to 1.00% by the end of next year. We have only pushed back the timing of our forecast for two further 0.25 point hikes in 2022, and now expect those to be delivered in May and August bringing the policy rate to 0.75%. We remain sceptical though that it will rise beyond 1.00% in 2022.” 

“The pound sell off on the back of the sharp move lower in UK rates was to be expected yesterday. Downside risks for the pound would continue to build if market participants become more fearful that the BoE is falling behind the curve in responding to higher inflation in the UK.” 

“We will be watching closely the relationship between real yield spreads and pound performance. Real yields in the UK fell by even more than nominal yields yesterday as market-based measures of inflation expectations picked up following the MPC meeting.”