Analysts at MUFG Bank, favor a scenario with further weakens for the pound relative to the US dollar. They see GBP/USD could fall below 1.3000 for the first time in a year. They warn a surprise decision to hike rates from the Bank of England should trigger a bigger (bullish) GBP reaction especially as shorts have
been built up recently.
“We continue to favour further GBP weakness in the near-term especially against the USD, and expect cable to fall below the 1.3000 for the first time in just over a year. The timing of lift off for rate hikes by the BoE and Fed appears to be narrowing considerably if the BoE delays raising rates again while the Fed speeds up tightening plans.”
“One note of caution is that GBP shorts have already become a popular trade reaching their highest level in over 2 years amongst Asset Manager/Institutional and Leveraged Funds combined. As a result, a surprise decision by the BoE to raise rates would likely trigger a bigger GBP (bullish) reaction.”
“Omicron to make BoE more cautious over raising rates in near-term. A decision to leave rates on hold next week is better priced now which should help dampen negative GBP reaction. Dropping guidance for rate hikes in coming months would be bigger bearish surprise for GBP.”