Inflation and political uncertainty weigh heavily on sterling
With UK policymakers trapped between reducing inflation and boosting the flagging economy, analysts are struggling to see any upside for sterling.
Alongside the country’s political chaos, the UK’s economy is under enormous pressure – something that is clearly reflected in the fortunes of its currency. Research published by HSBC in July noted that sterling slipped 3.4% against the dollar in June, with the positive reaction to the Bank of England’s promise to act forcefully on inflation if needed fading towards the end of the month.
HSBC suggests the BoE will struggle to deliver as aggressive a hiking cycle as the US Federal Reserve, which should see sterling face ongoing downward pressure.
While the BoE has indicated that it is open to a faster pace of tightening, its monetary policy committee (MPC) has tended to place a lot of weight on the outlook for growth, even if inflation has had greater sway more recently.
“With activity data slowing and rising risks of a disruption to gas supply, should the BoE hike by less than is priced in this year – as we expect – this is likely to weigh on the GBP,” says Parisha Saimbi, G10 FX strategist at BNP Paribas Markets 360, which expects the central bank to hike by 50 basis in August (as is well priced) before reverting back to 25bp increments, up to a terminal rate of 2.5%