The British pound rose against the US dollar on Wednesday, as investors turn their interest to potential policy signals from the Bank of England. The British currency was not troubled by Prime Minister Boris Jonson’s woes over the partygate scandal.
BoE governor Andrew Bailey and policymaker Catharine Mann’s comments along with European Central Bank chief Christine Lagarde’s remarks, at the IMF meetings on Thursday will be carefully watched with traders paying close attention to the policy divergence between the two central banks. Any indication on how the BoE will proceed in terms of further rate hikes, after data last week showed that UK consumer price inflation hit at a thirty-year high, will provide direction for the British currency.
Weak economic growth to limit further rate hikes
The BoE has recently disappointed markets by softening its language about rate hikes, and ING and MUFG have warned that it will likely further disappoint tightening expectations this year.
The International Monetary Fund (IMF) on Tuesday forecast slower economic growth and more persistent inflation for Britain next year, with global economic growth forecasts being slashed due to the war in Ukraine. IMF forecasts for UK GDP growth this year were cut to 3.7% while for 2023 the growth rate was almost halved to 1.2% from 2.3%.
According to ING, the bank pointed out to clients that currency markets are expecting only 30 bps of BoE tightening at its upcoming meeting due to concerns about the economic outlook. Market expectations for BoE tightening are too aggressive they noted. The bank’s economists expect a 50 bp whereas currency markets have priced in 150 bp of BoE rate hikes by year-end.
MUFG has also noted: “We are not convinced the BoE will be in a position to deliver what is priced into the market with growth likely to be very weak through the remainder of this year. We assume two further 25 bp rate hikes by the BoE and then a pause.”
Economists at Scotiabank expect the pound to US dollar exchange rate to fall significantly in the coming months as the Bank of England (BoE) will not meet rate hike expectations. As they said: “The rates, economic, and political picture point to losses firming under the figure in the near-term. The IMF noted yesterday in its outlook review that the UK will see the highest rate of inflation this year among G7 countries, and it revised its GDP growth projections for the UK by roughly 1ppt in each of 2022 and 2023 amid the cost-of-living crisis.” They added: “Weak growth and the cost-of-living crisis are likely to keep the BoE from hiking by as much as markets expect this year.”
Pound untroubled by PM Boris Johnson’s woes
The British pound was untroubled by Prime Minister Boris Johnson’s political woes. The British PM on Tuesday offered an apology for attending an illegal party during lockdown but clarified he didn't break any rules knowingly and didn’t mislead Parliament.
After his apology on Tuesday, British lawmakers will vote on Thursday on whether Johnson should be investigated for allegedly misleading Parliament. The motion is not expected to pass, given the Conservative party’s ruling majority in parliament. While the currency market is especially sensitive to political uncertainty, investors are not so much focusing on this. Even if Johnson leaves, analysts have noted that this will mean a change of personnel and not a change of policy. The market’s focus for now remains on hints on future rate hikes from the BoE.
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