Political risks and the BoE’s challenging task of dealing with escalating UK inflation and the cost of living crunch risk of recession continue to weigh on GBP. Economists at Westpac note that GBP/USD is at risk of falling toward 1.21.

UK’s political backdrop has become more complex after local elections

“Last week’s Bank of England meeting surprised with its elevated profile for inflation within the quarterly MPR (peaking above 10.4%). The MPR incorporated market pricing of BoE’s cash rate rising to 2.5%. Although a lower rate path might allow positive growth, it could fuel higher inflation (above 12%). The uncertainty in their outlook, especially given exogenous supply and cost risks, means that BoE will be increasingly data and survey-dependent. The MPC is facing its greatest challenge since its inflation targeting mandate began.”

“Although a national election is still some way off, UK’s political backdrop has become more complex after local elections which have refreshed independence concerns in Scotland and issues around NI Protocol. Both issues add to uncertainty and pressure on GBP.”

“Unless a clear rebound above 1.2500 occurs, GBP/USD risks a further slide to test 1.2100.”