The depressed economic outlook, the comparatively cautious monetary policy, which is likely to be confirmed by a return to a 50 bps rate step, and the continued high levels of inflation continue to principally put pressure on Sterling.” (COMMERZBANK)

Only 50 bps Hike

A 50 BPS hike is likely as the Bank of England doesn’t want to go big again at 75 bps as the economy faces recession and also to help consumers who face a cost-of-living crisis. We don’t expect a hawkish message either and expect another 50 bps hike next year and then the BoE to go on hold.

The BoE's trade-weighted measure of sterling has recovered nearly 8% from its lows in September and is now trading back to levels seen in early August.

Reasons for the GBP Rally NOT Bullish Fundamentals

 If we break down the rally about 50% was due to an improvement in the UK's fiscal credibility since the budget disaster back in September. The other 50% has come from broad-based selling in the dollar, where the US currency makes up about 20% of the BoE's sterling basket – the rise is therefore not to do with bullish GBP fundamentals and fiscal credibility return is just the status quo

In terms of the FED, the bad news in terms of interest rate expectations is in the price as we come into the Fed on Wednesday and this is followed by the Bank of England on Thursday – we think the GBP has already topped out and both high impact events have the potential to accelerate the decline.

GBP strength is unlikely to continue and the BoE hike is priced in - the UK's poor economic position and the fact the Fed will out-hike sterling sets up a sell-off to the downside.

Technical Analysis

Below our view of the key technical levels of support and resistance to look out for – A major portion of the rally since the September mini budget sell-off is likely to be retraced.