British Pound: BoE repricing risk keeps Pound vulnerable – BBH

According to Elias Haddad at Brown Brothers Harriman, GBP/USD is lower on broad Dollar strength and EUR/GBP is slightly firmer after weaker United Kingdom (UK) September Purchasing Managers' Index (PMI). The swaps curve implies about 100 bps of Bank of England (BoE) hikes to 4.75%, but Haddad argues the BoE may not need to tighten that much, leaving the Pound exposed to a dovish repricing.

Weak UK PMI and BoE expectations weigh

"GBP/USD is down on broad USD strength while EUR/GBP is a little firmer. UK September PMI undershot expectations. The composite PMI fell to a three-month low at 51.7 (consensus: 52.0) vs. 52.5 in August."

"The details showed services sector growth slowed, manufacturing activity gained traction, and inflationary pressures intensified."

"The swaps curve continues to imply about 100bps of BoE rate hikes in the next twelve months to 4.75%. In our view, the BoE may not need to tighten as much as markets expect. The UK economy is already operating below capacity, the Bank Rate at 3.75% is near the top of the BoE’s estimated 2% to 4% neutral range, and fiscal policy will likely turn more restrictive."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)