The British pound has come under renewed selling pressure over the past week resulting in cable breaking below the 1.30 level. In the view of economists at MUFG Bank, GBP remains vulnerable to risks of more abrupt UK slowdown and less favourable financial market conditions.

GBP remains vulnerable to further weakness

“We expect policy divergence between the BoE and Fed to become even more apparent in the coming months. Building evidence of a more abrupt slowdown for the UK economy will make the BoE cautious over-delivering further rate hikes beyond the 1H of this year. In contrast, the Fed is now more determined to front-load rate hikes to get the policy rate back to their neutral estimate of around 2.50% through the rest of this year, and there is less risk of sharper immediate slowdown for the US economy.”

“We expect the GBP to be more negatively impacted than the USD as market participants become more concerned over the negative implications for global financial conditions and the global economy from aggressive policy tightening. A deeper correction lower for global equity markets and a pick-up in financial market volatility would likely encourage a weaker cable rate as well going forward.”