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GBP/USD Slumps 1% as Traders Unwind BoE Rate Hike Bets

The pound slumped on Tuesday, adding to losses from a day earlier, as traders continue to unwind their bets for aggressive Bank of England rate hikes amid growing concerns about the UK economic outlook as inflation rages on.   

GBP/USD fell 1.3% to $1.2580.

“Weak retail sales and consumer confidence numbers highlighted that elevated inflation is biting for the consumer,” NAB Markets Research said in a note.

The negative data has forced market participants to reassess expectations that the Bank of England, or BoE, will follow an aggressive path of rate hikes.

“Tightening expectations for the 5 May BoE meeting have dropped backed to 29bp from 38bp early last week,” ING said Tuesday.

The central bank is caught between a rock and hard place that grows increasingly uncomfortable by the day as moves to aggressively rein in inflation risk tipping the economy into recession.

“We are now walking a very tight line between tackling inflation and the output effects of the real income shock, and the risk that that could create a recession and pushes too far down in terms of inflation,” Bank of England Governor Andrew Bailey said last week. 

The need to get inflation back to the 2% target, however, is expected to continue to drive the central bank’s monetary policy approach as bets on the Bank of England raising rates to around 2.25% by year-end remains intact.

Still, the path forward for the pound, particularly against the dollar, appears to lower rather higher.

“Sterling continues to trade on a fragile footing … most now feel that GBP/USD has to test 1.2500, and 1.2850 will now act as strong resistance - should it get that high,” ING added,

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