British Pound Slumps to Multi-Year Low Amid Aggressively Hawkish BoE Outlook

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The British pound resumed its plunged descent on Tuesday as it tapped the 1.2668 low in the London session. This drop comes after the GBP/USD pair dropped below the 1.2700 support for the first time since September 2020 yesterday.

From a monthly perspective, the forex pair is down by over 3%, as persistent weakness in the UK economy continues to weigh down the Sterling.

According to recent data from Reuters, British government borrowing in the 2021/22 fiscal year came in about 20% higher than the nation’s budget office’s forecast in March.

This highlighted the challenges faced by finance minister Rishi Sunak, who currently battles pressure to provide relief to households and businesses affected by worsening inflation as he works to replenish public finance after the surge of borrowing due to COVID-19.

British Pound in for More Declines: Foley

Head of Currency Strategy at Rabobank Jane Foley noted: “There is little sign of the pound moving back into favor with this morning’s borrowing data highlighting the difficulties of the Chancellor in softening the impact of the cost of living crisis given the increased weight of debt maintenance.”

Meanwhile, fears of more drastic COVID-19 measures in China could weaken global economic recovery and force investors to troop into safe-haven assets like the dollar.

In other news, reports show that money markets continued to cut back on their predictions on the size of Bank of England (BoE) rate hikes, pricing in about 141 basis points (bps) worth of rate hikes by the end of the year. However, analysts have asserted that fears of a recession and a slowdown in the employment rate could prompt the BoE to spread its monetary tightening plans.

Foley further noted that she expected an additional 25 bps rate hike in May to “only add to fears of a growth slowdown.” She added that “Sterling may fail to pick up much traction from a rate announcement next week.”