Despite the Bank of England hiking at the fastest pace in over a decade, Cable is on course for its worst quarterly performance since Q1 2020. Looking ahead to Q2, I lean towards a bearish GBP[1] stance against commodity currencies and currencies backed by increasingly hawkish central banks such as the USD[2].
GBP/USD Can Break Below 1.30
As the UK heads towards the biggest squeeze on incomes in a generation, the BoE has become increasingly cautious over downside growth risks. So much so that they have slightly tweaked their forward guidance, suggesting a possible pause in their hiking cycle. This is despite inflation pressures picking up. I believe there is a chance this happens when the bank rate is at 1%. However, should this not be the case, money markets are still far too aggressive relative to the BoE’s growing reluctance to continue raising rates, given the current trade-off between slowing growth and rising inflation pressures. In contrast, at the Federal Reserve, Powell and Co. are warming up to the idea of back to back 50bp rate rises in May and June, alongside quantitative tightening in order to return to neutral as quickly as possible. In turn, rate differentials are moving in favour of the USD.
US/UK 5yr Bond Spreads
Source: Refinitiv
That said, areas to fade GBPUSD[3] would be on relief rallies to 1.3200-50, looking for a move towards 1.2750-1.2800. The bearish outlook would be invalidated on a close above 1.3450.
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