Monthly Wrap: GBP – Pound rally upended by dovish BoE

Key takeaways:

• Pound bolstered by hopes for a mild recession.
• Dovish BoE brings an abrupt end to GBP rally.
• GBP Monthly lows: €1.14, $1.17, AU$1.77, NZ$1.90, CA$1.58
• GBP Monthly highs: €1.16, $1.24, AU$1.82, NZ$1.94, CA$1.68

The pound trended broadly higher over the past four weeks. Sterling saw particularly strong gains through the end of November amid hopes for a milder UK recession than previously forecast.

This optimism was supported by some upbeat UK data, including stronger-than-expected PMI releases.

An improving market mood also helped to underpin the increasingly risk-sensitive pound as we entered December.

During this period, we saw the GBP/USD exchange rate strike its best levels since mid-June.

However this uptick in pound then came to an abrupt halt in mid-December as the Bank of England (BoE) delivered its final interest rate decision of 2022.

The BoE raised interest rates by 50bps as expected this month. However, a dovish split within the Monetary Policy Committee sent Sterling sharply lower.

The decision by two policymakers to vote to leave interest rates on hold in December prompted speculation that UK interest rates may peak at a lower level than previously forecast.

Also weighing on Sterling in the latter part of December were concerns over the impact of widespread strikes during the key holiday trading period.

Looking ahead to the start of 2023, the pound could face headwinds as industrial action continues to disrupt UK economic activity.

GBP investors are also likely to keep a close eye on the UK’s latest GDP figures as they seek to gauge the depths of the country’s current recession. If growth beats expectations in November the pound could jump.

Sterling will also be highly sensitive to any comments from BoE policymakers over the coming month as investors look for more clues as to how the bank will shape its monetary policy next year.