Pound struggles against dollar, with more pain ahead as BoE hike bets overcooked

Investing.com -- The pound slipped against the dollar Tuesday as sourcing sentiment on risk assets pushed flows into the arms of the safe-haven dollar, with more pain likely ahead for the currency as some warn bets on Bank of England rate hikes are overstretched.

GBP/USD fell 0.34% to $1.2740.

“GBP is set to continue to underperform,” MUFG said, warning that expectations for another 50 basis of rate hikes are “excessive” as only one further 25 basis point hike is likely.

The less hawkish view on the rate hikes comes as incoming data strengthens the case for Bank of England, or BoE to “possibly pause its tightening cycle,” it added.

Others agree, with ING saying it a note that it believes “markets are overestimating BoE tightening, will have to scale down expectations.”

Last week, the BoE hiked rates by 0.25% for the 14th time and warned of risks of more persistent inflationary pressures beginning to “crystallise.”

But signs of softening in the labor market and recent retail sales data showing slower consumer spending is “certainly strengthening the case for the BoE to possibly pause its tightening cycle,” MUFG added.

Retail sales in the 12 months through July rose by 1.8% down from 4.2% the prior month and well below economists’ expectations of 3%, BRC Retail Sales data showed Monday.

As well as bets on a less hawkish BoE, the recent selloff in risk assets including equities has dampened demand for the pound, which has a high beta, or closely follows the move in risk assets.

The pound is likely to keep tracking the downward move in risk assets, ING says, forecasting the euro to likely benefit.

“Expect the pound’s beta-to-risk sentiment to remain elevated for now, and EUR/GBP can climb back to 0.87-0.88,” it added.