GBP/USD: Move towards 1.2000 or below not ruled out – Wells Fargo

The Bank of England (BoE) held its policy rate steady at 5.25%. The decision represents a loss of interest rate support for the Pound, economists at Wells Fargo report.

Policy rate pause could also be a policy rate peak

We now forecast that the current policy rate of 5.25% will be the peak for this cycle. We do expect rates to remain at that level for some time and, following a mild recession beginning late this year and as CPI inflation moves closer to the 2% target, forecast an initial modest 25 bps rate reduction only by the time of the May 2024 policy meeting. We expect the pace of rate cuts to gather momentum through the rest of next year, and see the Bank of England policy rate to end next year at 3.25%. 

The decision to pause and the probable end to policy tightening represents a loss of interest rate support. As a result and even though the GBP/USD pair has already moved below our medium-term target of 1.2300, we think the risks remain tilted toward further Sterling weakness through early 2024. In that context, a move to 1.2000 or below cannot be ruled out.