GBP/USD dropped to a 2022 low of 1.2065 in early NorAm trading on Monday and was poised to test early-COVID troughs by 1.1778, as sterling longs exit en masse ahead of Fed and BoE policy decisions in the next two days that are heightening rate divergence expectations, while post-Brexit uncertainties rumble on.
Sterling's accelerated weakness after the March BoE MPC meeting, when policymakers indicated normalization would be less austere than anticipated in an effort to save the economy from draconian inflation-fighting rate hikes.
The sudden shift to 75bps Fed rate-hike expectations for Wednesday FEDWATCH, after Friday's 8.6% annual inflation read, is expected to dwarf the BoE's move one day later.
GBPOIS markets BOEWATCH are indicating a 40% chance for a 50bp rise.
Short-term rate markets are pricing Fed hikes of 280bps by the December Fed meeting, while the BoE is expected to hike 194bps over the same timeframe.
With the rate advantage favoring dollar strength, and mounting UK trade nS8N2X805U and political uncertainties nL8N2XU11T weighing on GBP/USD, barring a dovish shift by the Fed or hawkish BoE escalation, sterling is likely to remain under pressure.
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