British Pound to Slip Towards 1.200 to US Dollar Facing BoE’s Reluctance to Act

The UK Pound Sterling has been under increasing pressure lately, and it can further accelerate down the road for a number of reasons. As we wrote this week, the biggest contributor to the currency’s gloom is the worsening macroeconomic environment. Thus, the UK’s producer prices soared 14% YoY in April from 11.9% in March, while the annual inflation rate accelerated to 9% in April, the highest since 1982, which is more than four times the Bank of England's 2% target while, according to a Reuters poll, Britain's worst cost of living crisis in three decades will not subside until late this year.

Correspondingly, many Fx traders admit that the pound has the weakest outlook among all the major currencies as the central bank's reluctance to raise interest rates aggressively means it has the lowest inflation-adjusted yield among its rivals.

Although the BoE was the first among major central banks to raise interest rates in December, now their predicted future path is not impressive at all (to say the least) than some of its global peers including the U.S. Federal Reserve.

While the British economy's problems are broadly typical to contemporary economic environments in the established markets, there are some unique factors weighing on the pound.

One of them is the exacerbating trade conflict with the European Union if Britain threatens to push ahead with a law to override parts of a post-Brexit trade deal for Northern Ireland. In this respect, Sinn Fein leader Mary Lou McDonald on Wednesday said Britain's proposals to override some post-Brexit trade rules in Northern Ireland were "astonishing" and yet another move by London that “only serves to boost the Irish nationalist party's quest for a united Ireland”.

Any protracted trade conflict would threaten to aggravate the current account deficit and further weaken the currency. According to Reuters, there will be an increase in tax thresholds, on workers and employers already dealing with surging energy bills. There are just too many headwinds facing the British economy for the BoE to keep calm and humble. Money markets now expect only 120 basis points of cumulative rate hikes by the end of the year compared to the Fed's nearly two full percentage points. Even a more cautious ECB is expected to raise interest rates by 108 basis points over that period.

Currently the British pound is hovering in a relatively narrow range between 1.235 and 1.247 to the U.S. Dollar. However, technically speaking, the GBPUSD can collapse towards 1.200 in the absence of a more pronounced BoE’s policy measures sooner rather than later.