Pound gloom to continue as expected BoE rate hike unlikely to stem struggles

investing.com:

Investing.com – The pound extended its gloomy slide against the dollar continued Monday, just days ahead of a widely expected Bank of England rate increase amid fears that a hike will come with side order of dovishness as the central bank is likely to signal that its rate-hike cycle is coming to an end.

GBP/USD fell 0.1% to $1.238, and is down about 3.5% since its recent peak in July.  

The Bank of England is expected to raise its policy rate by a further 25 basis points to 5.50% on Thursday, but there a “significant risk that the updated guidance sends a stronger signal that the rate hike cycle is closer to an end,” MUFG said in a Monday note.

As the curtain closes on rate hike cycle, U.K. government bond yields will likely fall, pressuring the pound, MUFG added.

Expectations for the BoE to lay out the carpet for the end of rate hikes have been gaining momentum following recent comments from BoE Governor Andrew Bailey.

In recent testimony before the U.K. parliament, Bailey said the BoE policy rate was probably “near the top of the cycle” as the pace of inflation was likely to see a marked drop this year.

In its most recent update last month, the BoE forecast inflation to fall to around 5% by the end of 2023, and eventually reach the central bank’s 2% target by early 2025.

For the pound, however, to snap out of recent malaise, the BoE would have adopt a more hawkish policy path and economic growth in Europe would need to improve. But as this isn’t a likely scenario in the near-term, Goldman Sachs says, the pound is poised to continue its struggles.

“Unfortunately, neither of those seem likely to shift in the near-term, meaning that a flattish EUR/GBP could persist for longer,” Goldman Sachs said.