Pound Sterling Outlook: "Period of GBP Strength Likely run its Course" say UBS

December 15, 2023 - Written by John Cameron

STORY LINK Pound Sterling Outlook: "Period of GBP Strength Likely run its Course" say UBS

UK Pound Jumps on Hawkish Bank of England Hold at 5.25%, GBP/USD Exchange Rate Tests 3-Month Best

The Bank of England (BoE) Monetary Policy Committee (MPC) held interest rates at 5.25% following the latest policy meeting which was in line with consensus forecasts.

There was another 6-3 vote for keeping rates on hold as Haskel, Mann and Greene again dissented and called for a further 25 basis-point hike to 5.50%.

There had been some speculation that some of the hawkish committee members would back away from their call to raise rates and the 6-3 vote triggered Pound buying.

The Pound to Dollar (GBP/USD) exchange rate jumped to resistance at 1.2725 and close to 3-month highs before settling around 1.2710 ahead of the Wall Street open.

The bank was also wary over near-term inflation developments; “Services price inflation declined to 6.6%, although much of the downside news relative to the November Report reflected movements in components that may not provide a good signal of underlying trends in services prices and of persistence in headline inflation.”

On wages it noted; “There remain upside risks to the outlook for wage growth, including from the possible effects of the recently announced increase in the National Living Wage.”

In this context, the bank continued to warn that policy would need to remain restrictive for an extended period of time.

The decision was described as finely balanced given the risk of over-tightening.

The dissenting members continued to judge that there was evidence of more persistent inflationary pressures and noted that financial conditions had loosened.

There was certainly no rhetoric signalling the possibility of rate cuts, in contrast to comments from the Federal Reserve on Wednesday.

Governor Bailey commented; "We've come a long way this year and successive rate increases have helped bring inflation down from over 10% in January to 4.6% in October. But there is still some way to go."

ING notes the hawkish rhetoric; “That’s not surprising, but it is another signal that the Bank isn’t totally comfortable with market rate cut pricing. Governor Bailey made this fairly clear in comments he made earlier this month.”

According to Commerzbank; “The high core rate is likely to serve as a good reason and he is therefore likely to be more successful at sounding hawkish. That might support Sterling temporarily. On the other hand, quite a lot has already been priced into Sterling which is likely to limit the upside potential.”

Athanasios Vamvakidis, global head of G10 FX strategy at Bank of America, said the BoE's main message about rates staying high "effectively is a push-back to market pricing early cuts".

He added; “the statement looks hawkish compared with the very dovish Fed yesterday."

The dollar overall has remained on the defensive and posted 4-month lows following Wednesday’s Fed policy decision which suggested that three rate cuts were likely in 2024.

US yields declined sharply after the statement and Powell’s press conference.

According to ING; “For us in FX, we had not expected it this early but last night's dovish Fed shift triggered a massive bull steepening in the US curve – a move that is the centre piece of our call for a broadly lower dollar next year.”

Scotiabank noted dollar weakness; “with the Fed leadership remarking that the FOMC was starting to consider the timing for rate cuts, markets are—unsurprisingly—betting on an early start to the easing cycle in 2024.”

According to the bank; “Spot trends are bullish and enjoy the solid backing of bullish trend strength signals on the intraday, daily and weekly DMI signals. A push above 1.2725 targets 1.2850. Support is 1.2650.”

Dean Turner of UBS Global Wealth Management expects current gains will fade; “The pound rose following the announcement. In our view, the period of sterling strength has likely run its course and we would look to sell the upside against the US dollar from these levels.”

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TAGS: Pound Dollar Forecasts