GBP/USD: Possibility of BoE cut to weigh on sterling in the first quarter – CIBC

The last month has seen sterling move towards the top of the performance league table due to a combination of positive risk dynamics, global reflation impetus and the avoidance of a no-deal Brexit. However, a challenging first quarter of the year could pressure the Bank of England (BoE) to consider a cut, weighing on the cable in the short-run, per CIBC Capital Markets.

Key quotes

“While we pushed up our medium-run GBP/USD forecast profile, we remain wary of extrapolating recent gains due to the possibility of a double-dip recession.”

“The February MPC meeting will see revised estimates which will reflect the impact of a third national lockdown. We expect the central bank’s previous assumption of a near 2.5% Q1 quarterly GDP gain to be replaced by a retreat of between 1.5-2.0%. Back-to-back GDP declines underline that the UK economy is likely to take until early 2023 to retake lost economic ground.”

“Ahead of the February MPC decision, BoE Governor Bailey has acknowledged that activity will be weaker than anticipated in their previous Monetary Policy Report, which risks putting pressure on the BoE to act. With the Bank reluctant to go negative, expect pressure on the BoE to consider a 10bp micro cut in order to provide some stimulus ahead of a vaccine dependent recovery into H2. Expect the latter to encourage GBP/USD to return to levels not seen since early 2018.” 

“Q1 2021: 1.35 | Q2 2021: 1.37”