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‘Significant’ rate rise likely as GBP/USD heads towards parity

Published: 10:15 28 Sep 2022 BST

Forex report

Sterling continued to flirt with record lows Wednesday as the Bank of England (BoE) eyes up a “significant” rate rise in response to chancellor Kwasi Kwarteng’s controversial mini-budget.

But hopes of an emergency rate-hike were dashed as the BoE's chief economist Huw Pill said the central bank should hold back until its scheduled meeting in November.

GBP/USD is currently trading at a record low of US$1.07, with some analysts predicting worse to come.

James Penny, chief investment officer at TAM Asset Management, said that “GBP looks very negative and will likely hit parity before Christmas”. 

Worse could be in store for record-low GBP/USD – Source: capital.com
Worse could be in store for record-low GBP/USD – Source: capital.com

At US$0.96, the Euro continues to push lower against the US Dollar, driven in large part by recession fears.

Bloomberg Economics’ base case is a 1% continent-wide contraction, though a worst-case scenario could be as much as 5% if the energy crisis deepens.

Ipek Ozkardeskaya, senior analyst at online bank Swissquote, noted that these figures are on par with 2008, or even worse.

Back then, central banks had scope to slash rates to zero and a “whatever it takes” approach to sovereign bond purchases.

Conversely, the ECB is expected to hike rates by at least 75 bps in the next two meetings.

Aggressive rate hikes in the US are keeping the Dollar strongest among the G10, while also hitting record highs against the Chinese yuan.

Hikes look set to continue, with Chicago’s Federal Reserve president Charles Evans telling CNBC that 4.5% by the end of the year is looking likely.

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