British Pound: Fiscal concerns may weigh on Sterling – Rabobank

Rabobank Senior FX Strategist Jane Foley discusses GBP/USD following the latest Federal Reserve (Fed) decision and ahead of the Bank of England (BoE) meeting. She expects GBP/USD to trade around 1.32–1.33 over the next one to three months. Hawkish BoE rhetoric may support Sterling initially, but steady interest rates and United Kingdom (UK) fiscal concerns could weigh on the currency further out.

Fed credibility, BoE rhetoric and UK fiscal risks

"On the back of yesterday’s steady policy outcome from the Federal Reserve, 30-year bond yields jumped. At the short end of the curve, rates dropped and the USD duly weakened. This move in asset values reflected the doubts that rose following yesterday’s meeting about whether Chair Warsh’s inflation fighting credentials were as real as he has recently professed them to be."

"Steady rates are widely anticipated, but the BoE is expected to talk tough to ensure that the market remains fearful of one or two rate hikes over the next 6 months or so. Like the FOMC, there are likely to be dissenters in the MPC voting for an immediate policy change this week. That said, there are several BoE watchers, including RaboResearch’s Stefan Koopman who expect the BoE to keep policy steady this year."

"In RaboResearch’s view, the heavy lifting done by the market may help the Bank avoid an actual hike in policy rates. That said, a key element of BoE policy going forward will be its interpretation of the risks surrounding second order price effects. At its June policy meeting, the BoE stated that there was “material risk” of second order price effects in wage and price setting."

"For now, the market is likely to continue taking the BoE’s hawkish rhetoric at face value and maintain its expectations of rate hikes. However, further signs of stabilisation in the UK labour market and/or another ramp higher in UK CPI inflation data from July could increase the pressure from the market for the Bank to put its money where its mouth is. We expect cable to trade in a GBP/USD 1.33/1.32 range on a 1-to-3-month view."

"Further out we see risk that UK fiscal concerns will combine with steady BoE rates to weigh on the pound."

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