GBP/USD to edge lower before rebounding later in 2022 – MUFG

The pound depreciated against the dollar in November although held up relatively well in response to the increased uncertainty related to the new Omicron covid variant. Economists at MUFG Bank expect the GBP/USD pair to move downward in the first months of next year before staging a bounce later in 2022.

A Bank of England rate hike in December will provide GBP with limited support

“But the OIS market currently has an additional 100bps on top of a December hike priced for 2022 and we view this as excessive and see those expectations coming down over the coming months – that will keep GBP/USD under downward pressure initially. Beyond Q1 2022, we then see scope for modest GBP gains as UK GDP growth picks up and cost of living concerns ease as inflation begins to adjust lower.” 

“A BoE rate hike in December will provide GBP with limited support, and higher yields in the US with the BoE refraining from tightening again in February will keep GBP/USD under downward pressure initially. Later in 2022, the reality of a more dovish Fed coupled with further BoE rate hikes will prompt GBP/USD to move higher.”