Cable managed to close on Tuesday as the only major to advance against the USD. Today, GBP/USD outperforms modestly as UK CPI rises above 5%. However, economists at Scotiabank expect the pair to dive below 1.30 as political risks loom and the Bank of England may disappoint the market.

Weakening support for PM Boris Johnson

“While we don’t think the strong CPI data (5.1% YoY) will motivate the BoE to hike this week, it does solidify February hike odds and may see the bank accelerate its tightening push toward its terminal rate (1% most likely).”

“A cautious tone and/or a unanimous hold that would check February rate hike expectations could see the GBP aim for a test of 1.30 in the weeks ahead.”

“PM Johnson faced the biggest Conservative rebellion since 2019 yesterday as 101 MPs of his own party voted against his proposal for vaccine passports for nightclubs and large venues. A defeat for the Tories in a tight by-election on Thursday in the usually safe Tory seat of North Shropshire would spell further trouble for the PM toward a possible vote of confidence.”

“Political risks may soon become a strong drag on the GBP and it is not improbable that the pound trades under 1.30 in Q1 if monetary policy failing to meet market expectations, surging contagions, and a PM confidence vote align.”