The pound suffered its worst decline since at least March 2020 on Friday, with GBP/USD shedding more than 300 pips. Analysts at MUFG Bank remain bearish on the pound, pointing out that the loss of confidence in the GBP is becoming increasingly worrying.
“Now we expect BoE to increase by 75 bps on November 3; a 100 bp movement cannot be ruled out. The OIS market is priced at a bank rate of 4.00% until the end of the year. We don’t think we’ll quite get there, but it’s clear where short-term rates are headed. The primary risk here relates to the timing of this huge fiscal stimulus alongside a lack of accountability.”
“We remain bearish on the GBP as it approaches levels closer to the all-time low of 1.0520 in 1985. There is certainly no ‘happy feeling’ from this fiscal gift and something seems to have raised the level of uncertainty which was already very high.”
“At the same time, the BoE’s decision this week to raise rates by ‘only’ 50 bps instead of 75 bps as e.g. ECB and the Fed could add to concerns that the BoE is lagging behind in its fight against inflation. We expect these political concerns about the appropriateness of both fiscal and monetary policy to remain in place for the near term, weighing heavily on the GBP. In addition, the renewed sell-off in global equity markets and tightening global financial conditions are making it more difficult to finance the UK’s increased current account deficit, adding to downward pressure on the GBP.”