GBP/USD: Bank of England’s expectations to put a floor under cable – CIBC

The GBP/USD pair will trade at 1.39 during the third quarter and also at 1.39 by the first quarter of 2022 according to the forecast of analysts at CIBC. They point out the market will be forced to consider earlier than expected action from the Bank of England, supporting the GBP/USD.  

Key Quotes: 

“We expect UK interest rate expectations to reflect macro dynamics as we look towards the August 5th BoE Monetary Policy Report (MPR). Heightened data sensitivity comes as the updated MPR is set to include upgrades to both growth and inflation expectations.”

“Upgraded inflation expectations will test the bank’s narrative that inflation is temporary, especially in the context of the warning from the now departed BoE Chief Economist Andy Haldane regarding the risks of CPI potentially reaching 4%, a move that could threaten to de-anchor inflation expectations.”

“As the UK moves towards a full stage 4 unlocking on 19 July (the final decision will be made on 12 July), the prospect of temporary bottlenecks and supply pressures are building. The rapid erosion of spare capacity, due to strong consumer led growth, potentially requires an earlier than expected response from policymakers. We expect the market to increasingly price in a rate reversal come May 2022. With BoE assumptions of a 10% rundown in post Covid excess savings now looking too conservative, expect the market to be forced to consider earlier than expected BoE action in 2022, putting a floor under Sterling versus the USD.”