Sterling to weaken as markets adjust its BoE rate hikes expectations to the downside – Commerzbank

GBP/USD lost more than 100 pips on Monday and was last seen fluctuating in a tight range near 1.31. The Bank of England (BoE) is expected to hike rates to 2% by end-2022 – this aggressive pricing poses downside risks for the British pound, economists at Commerzbank report.

A key rate at around 2% at year-end seems exaggerated 

“Contrary to, for example, the US central bank there is no sign in the BoE’s communication pointing towards further-reaching action than the modest tightening over the coming months that has already been signalled. A key rate at around 2% at year-end, as the market is pricing in, seems exaggerated to us.”

“The market expectations are likely to be further fuelled with each set of high inflation data, but once signs that the British economy is weakening further increase the market might have to adjust its expectations to the downside. Medium-term we, therefore, see downside risks for sterling.”