The Pound to Euro (GBP/EUR) exchange rate slumped to 2-week lows just below 1.1470 after the Bank of England policy decision with UK political risks also undermining Sterling.
Despite near-term downside risks for the Pound, CIBC sees scope for medium-term stabilisation and it can trade at 1.15 by the end of 2026.
Although the Bank of England held interest rates at 3.75% last week, CIBC noted that there was a notably dovish stance with a 5-4 vote. Governor Bailey was close to backing a cut and, unless there is very strong data in the interim, it is very likely that there will be a majority for cutting in March.
CIBC also notes that there are important political uncertainties with Prime Minister Starmer under pressure from the Mandelson scandal.
In this context, it expects that economic and political risks will maintain near-term Pound vulnerability.
From a medium-term perspective, however, CIBC considers that the markets are potentially over-estimating the scope for interest rate cuts. Given stubborn wage and inflation pressures, CIBC considers that it will be difficult to justify cutting interest rates below 3.50%.
With markets pricing in two rate cuts this year, any shift in expectations would support the Pound.
