GBP/USD could fall to around 1.25 as EUR/USD falls to 1.06 .

Economists at Société Générale outline the impact of the base-case economic outlook (conviction level of 50%), the upside scenario (25%) and the downside scenario (25%) for the GBP/USD pair. In the base case scenario, the GBP would reach 1.30 against the USD. The upside scenario sees the GBP at 1.35 while in the downside scenario GBP/USD could fall to around 1.25.

Base case for 2Q22 (50% probability)

“GBP/USD at 1.30. In the normal course of events, EUR/GBP correlates positively with EUR/USD, with sterling doing better than the euro when the latter is falling against the dollar, and viceversa. The sterling rates market currently prices rates at 0.7% by mid-year, marginally below our 0.75% forecast, and on that basis, we don’t see much movement in EUR/GBP. Our 1.30 GBP/USD forecast reflects our 1.09 forecast for EUR/USD.” 

Upside scenario for 2Q22 (25% probability)

“GBP/USD at 1.35. Although the natural bias is for EUR/GBP to rise when EUR/USD does, we suspect this wouldn’t be the case in 1H22. The better the prospects for escaping the clutches of COVID-19, the more aggressive the MPC can be, taking GBP/USD higher.”

GBP/USD at 1.25. A downside scenario decreases the chance of UK rate hikes and increases the chance that future rate hikes are priced out of the curve. Sterling loses any argument for strength relative to the euro other than the ‘normal’ beta with EUR/USD. GBP/USD could fall to around 1.25 as EUR/USD falls to 1.06, leaving EUR/GBP at 0.85.”

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