GBP/USD: A dip below 1.30 towards 1.28 seems the more likely development – Scotiabank

Markets have sharply re-priced central bank expectations for the Bank of England (BoE). However, expectations are still too high, therefore, the pound could suffer significant damage, economists at Scotiabank report.

GBP/USD could challenge 1.34 if the stars align

“After falling to ~117bps expected by year-end on Friday, OIS pricing is back to expecting a Bank Rate above 2% at the end of this year with ~140bps in hikes projected. This implied policy rate is about 65bps higher than where BoE communications suggest it will be at the December meeting, and we think it will be tough for the GBP to gain ground against the USD while a re-pricing of hike expectations weighs on it.”

“Smaller than expected damage from the war in Ukraine may be GBP positive but even prior to the war the BoE seemed unlikely to meet lofty market expectations.”

“If the stars align, the GBP could aim for a test of 1.34, but gains beyond this level look limited – while a re-test of 1.30 towards 1.28 seems the more likely development.”