The pound sterling is trapped in a stagflation vortex, a recent outlook by JP Morgan warned. The bank sees GBP drop deeply against USD this year.

This week, GBP/USD was pushed down by UK PMI data. According to the data release, business activity in the UK slowed down sharply in May.

S&P Global's Composite Purchasing Managers' Index also fell to a 15-month low.Weak macroeconomic data has boosted recession fears, which have been intensifying over the past couple of weeks.

Currently, markets are worried that the UK economy could not withstand another interest rate increase by the regulator, which strives to bring record high inflation under control.

Since December, the Bank of England has increased interest rates 4 times, with the next hike expected to occur in June.

However, recent economic data throw these plans into question.

The BoE is in a precarious situation. On the one hand, inflation continues to accelerate, which demands an immediate aggressive rate hike. On the other hand, there is a high risk of an economic slowdown. In this situation, the regulator should not move the rates upwards to quickly to avoid triggering a recession in the UK.

According to JP Morgan, the UK is now "a poster child of stagflation". "To describe this combination of double-digit inflation and zero growth as toxic for the exchange rate would be an understatement," Paul Meggyesi, Head of Global FX Strategy at JP Morgan in London said. "We are making pretty deep cuts to our GBP forecasts once again this month."

Analysts expect the Bank of England to shift to dovish policy in the months ahead, putting strong bearish pressure on GBP/USD

JP Morgan analysts now expect the pair to fall to 1.14 in the third quarter of 2022 and reach 1.16 by the end of the year.

Earlier, the bank forecasted that GBP/USD would finish 2022 at 1.31.

Furthermore, continuing tensions between UK and EU threaten to push down GBP even deeper.If the United Kingdom makes unilateral changes to the Northern Ireland Protocol, the European Union could start a trade war with the UK, which would severely affect the UK economy and its currency

US analysts see bleak prospects for the pound sterling, which is expected to suffer losses against the US dollar.

JP Morgan strategists are certain the US dollar multi-month uptrend is not over yet. USD will continue to climb amid falling demand for risky assets due to rising risks of global recession.