GBP/USD: Two headwinds to limit sterling strength – ING

Sterling has enjoyed a slightly more hawkish Bank of England (BoE), yet the (small) hiking cycle looks fully priced and tension with Brussels end September should limit GBP strength, according to economists at ING.

GBP continues to perform well but further upside may prove increasingly difficult 

“The first challenge is the pricing of BoE tightening. GBP money markets look like they have 15bp of tightening priced summer 22 and another 25bp by end 23. That would take the Bank Rate to 0.50% and a level where the BoE may shift to ‘Quantitative Tightening’ – active reduction of the balance sheet. Market pricing of the Bank Rate is sticky at 0.50%.”

“The second challenge is politics. End September see the exclusion of N.Irish trade expire and could trigger fresh rancour between London and Brussels – leading to the threat of EU tariffs.” 

“Tighter UK fiscal policy may also start to limit GBP topside.”