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Pound Sterling has fallen to a new 2021 low against the Dollar on Thursday as a trend of weakness extends with little on the horizon suggesting a turn in trend is likely.
The Pound to Dollar exchange rate (GBP/USD) fell to a low of 1.3363 on Thursday and looks set to end 2022 testing fresh 12-month lows, according to strategists who are wary of backing the currency following the Bank of England's surprise turn at its November policy meeting.
Analysts say the Bank of England's decision to swerve a November rate hike has injected uncertainty into the market, meaning the Pound is unlikely to receive any meaningful support from developments in interest rate markets, which remain an important driver of currency valuation.
"Our take on last week's BoE policy announcement is that it created additional uncertainty for the FX market," says Stephen Gallo, European Head of FX Strategy at BMO Capital.
GBP/USD has fallen back to 1.3363, having been as high as 1.3692 on the eve of the Bank's policy decision where interest rates were left unchanged and fresh guidance drew doubt on the prospect of a December rate hike.
Another impulse lower in the exchange rate has followed the release of data that showed U.S. inflation surged in September, while UK GDP data for September showed the economy had rebounded but the UK remains a laggard amongst its G10 peers.
"The pound was lower after this morning’s GDP release with GBP/USD trading below 1.34, down from around 1.3650 a week ago," says Hann-Ju Ho, an economist at Lloyds Bank.
Above: GBP/USD at daily intervals.
- GBP/USD reference rates at publication:
- High street bank rates (indicative band): 1.3024-1.3118
- Payment specialist rates (indicative band): 1.3272-1.3326
- Find out about specialist rates, here
- Or, set up an exchange rate alert, here
With UK growth subdued foreign exchange analysts question the ability of the Bank of England to raise interest rates materially, thereby depriving Sterling of potential support.
"The BOE’s forward guidance confuses more than it guides," says Terence Wu, Strategist at OCBC.
"Going forward, there is an argument that a BOE rate hike is actually a policy misstep. We steer clear of the GBP until we have more clarity on that," adds Wu.
Like the U.S., the UK is going to see elevated inflation over coming months and the Bank of England's economists are forecasting forecasting inflation to still be above target in 2023.
"This is not exactly a 'dovish' forecast curve for inflation, considering that the MPC's median assumption for average inflation in 2024 with no tightening of policy over the next 3 years is north of 2.6%," says Gallo.
The tightening of monetary policy will offer Sterling some downside protection, but until growth materially accelerates it remains difficult to see the Bank pushing rates much beyond the 0.50%-0.75% area.
BMO can't see "a compelling rationale for GBP/USD spot to strengthen considerably".
Gallo says he is watching next week's labour market data as it could matter greatly to the Bank of England.
A strong set of readings could give the Bank confidence to hike rates in December.
"Consistent strength in these readings mean the prospect of a December tightening by the Bank can't be ruled out," says Gallo.
But odds of such a move are still seen as low, partly because the Bank has record of standing pat in December.
"We think the 1.37/1.38 range in GBPUSD is likely to act as a formidable area of resistance for the pair," says Gallo.
The Dollar meanwhile looks set to remain supported right across the board.
"We continue to see upside risks for the US dollar over the medium term stemming from an underpriced Fed. Powell's reluctance to push back on market pricing of hikes was followed by his comment that the US economy could see full employment next year," says Ben Randol, FX strategist with Bank of America.
Bank of America interpret action following last week's Fed decision as being consistent with an FX market that still sees the Fed as wanting to run the economy hot.
"This combined with a potentially faster pace of taper in 1H still suggests that the risks are asymmetric in the direction of tighter than expected US monetary policy," says Randol.