The pound had been favoured to outperform through Q4/Q1 thanks to expectations that the Bank of England (BoE) would quickly hike this year. However, economists at Scotiabank note that high energy prices and easing hawkishness from the BoE present strong headwinds for the GBP outlook.

GBP at risk as markets overplay their hand in BoE hike bets

“Recent developments and comments from bank officials –in contrast to the increasingly hawkish Fed – now point to very limited GBP upside on the basis of domestic drivers.” 

“The UK’s cost-of-living crisis, with real disposable incomes set to decline this year by the most on record (mid-1940s), means the BoE will not match elevated rate hike bets in markets.” 

“OIS pricing that sees rate increases by year-end to 2–2.25% is in for a big disappointment, with the BoE likely to stop at 1.50% – resulting in a weaker GBP.”