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UK financial reforms but sterling outlook remains worrisome

2022-12-12
1364

[The expected changes in the Bank of England's terminal interest rate will be the focus]

Market forecasts for the BoE's terminal interest rate range from 3.5% to 4.75%. If there is still a huge divergence in expectations that BoE rates may peak after next week's BoE rate decision, the pound could see further volatility. Money markets are currently pricing in a Bank of England rate of 4.5% by May 2023, with a 50% chance of reaching 4.75% by August 2023. Sterling could benefit if the Bank of England takes a hawkish stance and raises interest rates to 4.75% or higher next year.

[The Bank of England is expected to raise interest rates by 50 basis points]

Economists at HSBC said that due to the fragile risk appetite and the Bank of England's expected 50 basis point rate hike at the meeting on December 15, we expect the pound to decline in the short term. The structural concerns that tipped GBP/USD lower in October have been less pronounced. The autumn budget has restored confidence in the UK's finances, and the UK's external imbalances have shown some signs of improvement, especially in terms of visible trade. All things considered, we expect a downside correction in GBP/USD in the short-term, but a sharp drop is unlikely.


[The Bank of England will raise interest rates next week and it will be difficult to boost the pound]

The Bank of England's Dec. 15 meeting may not have much impact on the pound as the market has already priced in a 50 basis point rate hike and the pound will struggle to extend its recent recovery in 2023. Despite the looming recession, the Fed continues to fight inflation in the first quarter of 2023, the dollar looks set to strengthen, GBP/USD is unlikely to sustain above 1.23, and EUR/GBP may return to the 0.87-0.88 range. With central banks raising interest rates or triggering a recession, the investment environment is challenging, and the pound may underperform given its high sensitivity to global equities.

[Sterling will face more pressure]

Economists at Commerzbank expect more pressure on the pound. Currently, it is widely believed that the mini-budget crisis is under control, and there is no evidence that the energy crisis will escalate further. But in the view of the bank's economists, this can only give the pound a temporary respite. The sluggish economic outlook, relatively cautious monetary policy and persistent high inflation will continue to put heavy pressure on the pound.

[UK launches financial regulatory reform]

Britain's Treasury unveiled plans to overhaul the financial sector, including a review of rules that hold bankers accountable for their decisions and easing capital requirements for smaller lenders. Britain's government is under pressure to relax rules as Amsterdam overtakes London as Europe's biggest stock trading hub. Also included in Britain's financial reform plan is a review of short-selling rules, an overhaul of the prospectuses companies issue when they go public, and the repeal and reform of rules introduced during Britain's time in the European Union.

[The cold wave is coming, British households can't afford heating bills]

The Met Office has warned that an arctic storm is battering the UK, with nighttime minimums likely to drop as low as -10C this week. In most cities in the UK, including London, the minimum temperature this week is generally below 0 degrees Celsius. More than 3 million low-income British households are unable to pay their heating bills amid a combination of cold spells, high inflation and energy shortages. According to the questionnaire survey of low-income groups by the British Joseph Rowntree Foundation, about 4.3 million British people have cut their heating expenses. Many British households are already behind on their bills, with the average owed more than £1,600.

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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