GBP/USD to tick down towards the 1.30 level by year-end – MUFG

The pound’s relative underperformance this week was partly driven by the announcement  of new covid restrictions in the UK. These measures have pushed back Bank of England’s (BoE) rate hike expectations. Subsequently, economists at MUFG Bank expect the GBP/USD pair to edge lower towards the 1.30 level.

BoE rate hike expectations delayed to early 2022

“The UK government will move to the next stage of tighter COVID-19 restrictions in response to the spread of the Omicron variant. The dampening near-term impact on the growth outlook has further encouraged market participants to scale back BoE rate hike expectations. When combined with recent more cautious comments from BoE officials, we now expect the BoE to delay raising rates until at least February. In contrast, we still expect the Fed to speed up the pace of their QE programme this month.” 

“The time gap between the first BoE and Fed rate hikes is likely to be much shorter now than initially expected which should keep downward pressure on cable heading into year-end and moving it closer to the 1.3000-level.”