Sterling has outperformed many other G10 currencies so far this year.
Downside risks to domestic growth could cap sterling gains
GBP/USD fell below the 1.30 level as markets priced in the Bank of England’s (BOE) policy rate peak at around 5.85% from 6.00% on 18 July following a dip in inflation in June (Bloomberg, 20 Jul 2023). That said, another 50bp rate hike will no doubt be discussed at the August 3rd meeting, but pricing in continued hikes after that looks fragile and any downside adjustment would weigh on GBP through the rate channel.
Furthermore, the effects of prior monetary tightening will only become more severe over time, and there are downside risks to current economic resilience as factors supporting deflation ease in the fourth quarter. We remain bullish on GBP amid a broad-based USD decline, but we are watching closely to see if these signs become more pronounced as this could cap gains in GBP. Therefore, we think GBP/USD may struggle to move beyond the 1.30 level.
