Follow this week's Bank of England decision

[The probability of the Bank of England raising interest rates is 90%]

The market expects the Bank of England to raise interest rates at its eighth meeting on Thursday (November 3) to control inflation over 10%. The market believes that the probability of the Bank of England raising interest rates by 75 basis points to 3% on November 3 is about 90%. The UK's interest rate hike and expectations are relatively strong, so the pound is more resilient than the euro. However, in the context of the strong dollar, it is still difficult for the pound to rebound too much, and it is expected that the pound will fluctuate in the short term.

[The Bank of England may raise interest rates less than expected]

Sterling faces another round of losses as growth risks become more apparent in 2023 and the Bank of England may raise interest rates by less than market expectations. The UK government could overreact to the recent instability in government bonds or gilts and tighten fiscal policy excessively, "increasing the likelihood of weaker UK growth/longer recession". Market expectations for the Bank of England's top rate have been lowered to 4.75% from 6.00%, given the prospect of tighter fiscal policy. However, the Bank of England may raise interest rates less than expected. Tight fiscal policy has shifted the balance between inflation and growth risks.

[The new prime minister has to solve economic problems]

Britain has gone through three prime ministers, and economic policy has undergone dramatic changes. Former Prime Minister Jensen adopted a policy of reducing spending, while Truss adopted a means of cutting taxes and increasing spending. The wavering economic policies have brought a lot of uncertainty to business operations and left a series of unsolved economic problems for the new Prime Minister Sunak.

[GBP may fall below fair value]

Sterling could fall further below its long-term fair value, but this excessive depreciation is unlikely to continue; according to a range of sterling real effective exchange rate valuation measures, the pound began to reach extreme cheapness following the structural shocks of 2016 and 2008 Previously, a further 10% drop in sterling seemed reasonable. That could bring GBP/USD to parity from its current level of 1.1523, but such extreme valuations are rarely sustainable and have the potential to improve foreign inflows.

[The pound and the dollar may continue to fall]

As the Bank of England's monetary policy will be more cautious than expected, coupled with the upcoming tightening of fiscal policy by new Prime Minister Sunak, may weigh on GBP; GBP/USD may return to below 1.1500 this week as the dollar is likely to remain strong, It also suggests that EUR/GBP is short-lived below 0.8600.

[UK manufacturing industry declines]

UK manufacturing output fell further early in the fourth quarter as the sector was hit by weak demand, high inflation, supply chain constraints and heightened political and economic uncertainty. The number of new jobs fell at the fastest pace since May 2020 as demand weakened in both domestic and export markets. While the downturn has eased price pressures, a weak pound and high energy prices mean that rising cost inflation remains a major concern for manufacturers.

[Goldman Sachs raises GBP/USD forecast]

Goldman Sachs analyst Michael Cahill described the outlook for the pound after Sunak's appointment as prime minister: "It's better, but not so good;" Cahill said in the wake of recent UK political and economic developments and his colleagues raised their sterling forecasts; Goldman Sachs now sees 1.10, 1.11 and 1.22 GBP/USD targets in three, six and 12 months (previously 1.05, 1.08 and 1.19).