The pound has o started this week on a softer footing following dovish comments yesterday from Bank of England (BoE) Governor Bailey. It has resulted in cable falling back below the 1.31-level. Economists at MUFG Bank believe that GBP/USD is set to retest support and break below the 1.30-level.

Governor Bailey’s comments reinforce expectation for policy divergence

“BoE Governor Bailey explained that the BoE softened their forward rate guidance to reflect the high level of economic uncertainty in light of the additional negative shock from the Ukraine conflict.” 

“The UK rate market is now expecting the BoE to deliver 25bps hikes at upcoming meetings and a cumulative total of around 136bps of hikes by the end of the year. The US market has moved to price in an even more aggressive path for rate hikes with a couple of 50bps hikes priced in over the next three FOMC meetings and a cumulative total of 212bps by the end of the year.”

“A retest and a break below the 1.30-level for cable appears increasingly likely in the near-term.”