Two things have the potential to weigh on the pound sterling exchange rate, namely the estimated BoE rate hike that is excessive and the weak leadership of PM Boris Johnson.
One of the factors that boost Sterling today is the BoE 's unexpected decision to raise interest rates last week . The statement accompanying the decision also made market players bet more aggressively on Sterling, to the point of predicting the BoE will raise interest rates three times by 2022. Unfortunately, analysts think that estimate is too much.
“In our view, the market is still pricing in too many BoE rate hikes for 2022. We anticipate that some will collapse in the months ahead and this could weigh further on the pound,” said Jane Foley, head of FX strategy at Rabobank, “We expect EUR /GBP is edging up towards 0.87 over the next year.”
Foley and his team at Rabobank also project that there are political risks to the pound sterling. The political risk is not related to the remnants of the Brexit problem, but rather the weak leadership of PM Boris Johnson in the midst of the successive waves of COVID-19.
"Despite PM Johnson delaying announcing stricter measures following the launch of Plan B earlier this month, many major events have been canceled in the UK and the hospitality sector is suffering as people choose to stay away," continued Foley, "despite no general election imminent in the UK, Johnson's leadership looks weak. This does not strengthen confidence in the post-Brexit UK and, at the very least, will eat away at the pound."
Stephen Gallo, Head of European FX Strategy at BMO Capital Markets, shares a similar view. He said, “There may be a leadership challenge within the Conservative party in 2022, but the risk of impromptu elections is quite low. However, the issue of a second Scottish independence referendum could curb GBP appreciation from the second half onwards... This risk is reflected in our GBP/USD 12M projections Our 3M and 12M projections are 1.29 and 1.32, respectively."
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