Vantage Point: Economic Outlook  

What is the outlook for sterling?

Trade flows and business investment have also suffered, due to the increased trading barriers arising from Brexit. Taken together, these problems simply bolster the case for thinking the UK will be unable to skirt a recession in the second half of the year. 

Cautious BoE leaves pound lacking support

While Threadneedle Street might have helped fire the starting gun of 2022’s policy tightening among central banks, the Monetary Policy Committee has since been overtaken by the likes of the Fed and the Bank of Canada. 

The BoE has steadily raised rates – but in 25 basis point increments. Over in the US, the Federal Open Market Committee has moved from 25bp to 50bp and now 75bp. In the wake of the latest US consumer price index figures, even a 100bp rise is now being suggested. But in the US the economy looks stronger – employment is more robust and the economy there has not undergone a major status change vis-à-vis its most important trading partners. The MPC’s caution is certainly justified – the above problems besetting the UK economy mean that a more aggressive policy risked tipping the UK into a recession, which in itself would have done little for the pound’s prospects against the dollar. 

It is notable that the pound has done better against the euro, which makes sense given that the European Central Bank has had to be dragged kicking and screaming into contemplating rate hikes. Frankfurt is likely to move just as gingerly as its counterparts in the UK have done, indicating that, on this basis at least, the euro might not have much of an edge over the pound. That might also change as the second half of 2022 goes on, and is something to watch over the summer and into the autumn. 

The big hope for a GBP/USD rebound comes from the possibility that the Fed will ease off after its next meeting. 

Despite the 9.1 per cent CPI reading in the US, the recent slump in commodity prices might point towards a weakening of inflation increases, which could result in the Fed slowing and even pausing its tightening policy to assess the next steps. This however would require the BoE to press on with even a cautious hiking policy, something that is also in question in the medium term.

The pound’s future still looks tough. Weak GDP growth, a possible recession, further disruption from Brexit and the problems of competing monetary policies make it hard to argue that sterling is due for a sustained rebound against the dollar, and even against the euro it has a difficult job ahead of it. There is still a way to go before GBP/USD returns to its 2020 lows, but this remains a distinct possibility.