📝 See Risks Of GBP/USD Dropping to 1.20: Rabobank Strategy

On the back of government action on energy price subsidies, and base effects in wholesale energy prices, the Bank is expecting UK CPI inflation to fall significantly in Q2 2023. However, in our view the MPC will likely announce two more 25 bps rate rises this cycle to ensure price pressure and inflation expectations remain under control. While further rate rises should be currency supportive, this outlook is already mostly baked into the price.

A drop in headline CPI inflation to 9.8% y/y is expected, with the survey suggesting a fairly tight skew of forecasts. Core inflation is expected to moderate modestly to 6.0% y/y. Data in line with expectations will likely underscore the market’s confidence in the prospects of another 25 bps hike next month. While GBP may see some modest gains, these are unlikely to be significant.

The cautious recovery in sentiment has pushed against the safe haven USD which has also being undermined by market optimism that the Fed may be cutting interest rates before the end of the year to soften recessionary risks. While the USD may retain a softer profile near- term we see risk of further bouts of USD strength this year.

Tighter financial conditions in the G10 could accentuate these vulnerabilities and those in the global economy overall. The IMF this week outlined a ‘plausible’ alternative scenario to its baseline forecasts in which global growth slips to just 2.5% this year led by weakness in advanced economies where growth could dip below 1%.

It is likely that such scenario trigger capital outflows from emerging markets and a create a rush towards safety and the USD. We cannot rule out the risk of further choppy conditions in the USD’s outlook and for choice we maintain the view that the USD will strengthen on a 6 month view. This suggests risks of a drop in cable back to the 1.20 area this year.

- Rabobank Strategy