The UK rate market moved to price in more front loaded rate hikes from the Bank of England (BoE) following the hawkish comments from Governor Bailey over the weekend which has seen cable rise back to within touching distance of the 1.3800-level. Nonetheless, economists at MUFG Bank still expect GBP/USD to move downward into year-end due to slow growth and high inflation.
BoE setting up rate hike at next policy meeting
The GBP is still not fully benefiting as much as expected from the ongoing sharp rise in UK yields. The UK rate market continued to adjust sharply higher yesterday to fully price in a rate hike by the BoE at their next policy meeting in November. We have brought forward our forecast for the timing of the first BoE rate hike to November when we expect the first 15 point hike to be delivered which we expect to be followed by a 0.25 point hike in February.
The faster pace of tightening poses some upside risk to our pound forecasts in the near-term. However, we are still sticking to our view that the GBP is more likely to weaken heading into year-end given the more challenging backdrop of slowing global growth, higher inflation and tightening liquidity conditions which should be less supportive for risk assets and high beta currencies like the pound.
More front-loaded BoE tightening could also be viewed as more of a policy mistake if the UK economy slows more notably heading into year end triggering a weaker pound.
