GBP/USD: Sterling will struggle to strengthen given structural factors for UK remain an Achilles heel – MUFG

GBP/USD has risen up towards the 1.16 level and EUR/GBP has fallen back below 0.86 as more fiscal policy stimulus is on the way in the UK. Still, the pound remains vulnerable to further weakness, in the view of economists at MUFG Bank.

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“The improvement in the cyclical outlook for the UK economy should offer more support for the pound at current weaker levels. On top of the energy price support, Liz Truss is planning additional tax cuts totalling around GBP30 billion which should help ease the BoE’s fears over five quarters of GDP contractions starting in Q4 of this year.” 

“We should expect the BoE to deliver more rate hikes than they were planning in August even if the inflation peak is lower. But we remain sceptical that the BoE will raise the policy rate as high as current market expectations for a peak of around 4.50% next year.” 

“The pound though would remain vulnerable to further weakness if global financial conditions continue to tighten. It is far from guaranteed that the pound will strengthen on the back of the improving cyclical UK outlook and higher rates given structural factors for the UK economy remain an Achilles heel.”