In the view of economists at CIBC Capital Markets, financial markets look to be expecting too much tightening from the Bank of England (BoE) this year, which will weigh on sterling ahead as markets recalibrate.

Markets expecting too much from BoE

“The March BoE meeting resulted in a 25bps hike to 0.75%, marking three straight hikes. However, in view of BoE warnings over rising policy risks and adjustments to policy language, we view the move as a dovish hike, and we maintain a bias towards sterling weakness over the next few months.”

“We assume that once rates hit 1.0%, triggering the QT threshold, the bank will be reluctant to rush towards additional tightening. Hence if we see 1.0% in May, we would expect a protracted pause thereafter, likely extending into 2023.” 

“Our expectation for a less aggressive policy profile than what’s implied by the interest rate market underlines risks of GBP underperformance.”