Softer consumption backdrop amid the April tax hike is set to weigh on sterling, compounded by trade friction risks with the EU. Consequently,  economists at CIBC Capital Markets expect the GBP/USD pair to drop towards 1.33 by year-end.

Advancing UK/EU trade frictions points towards increasing GBP headwinds into early 2022

“The Bank of England failed to pull the rate trigger in November. We expect rates to be hiked by 15bps in February, reversing the March 2020 emergency cut. However, we expect the BoE to be more circumspect in 2022 than what is still assumed by the market, which is pricing in 95bps of hikes in the next 12 months.”

“A slowing macro environment and relatively contained inflation expectations point towards a less aggressive rate cycle. Rising prices risk disposable incomes being compromised prior to an already announced tax hike. That combination points to consumption headwinds which will compromise the real economy.” 

“The risk of advancing UK/EU trade frictions also points towards increasing GBP headwinds into early 2022. As a consequence, we have revised down our sterling outlook and forecast GBP/USD at 1.33 by year-end.”