British Pound: Soft GDP could trigger dovish BoE repricing – BBH

Brown Brothers Harriman’s Elias Haddad has stated that a stronger-than-anticipated United Kingdom Gross Domestic Product (GDP) print would benefit the British Pound (GBP). Haddad anticipates UK real GDP growth to decelerate in Q2, primarily due to reduced consumption as tighter financial conditions and lower real income growth curb demand.

Consequently, the current market pricing of a 50 basis points increase from the Bank of England (BoE) could be subject to a dovish adjustment if the data falls short of expectations. The BoE projects a softer growth rate of 0.3% quarter-over-quarter in Q2, versus 0.6% in Q1, with consumption growth expected to decelerate to 0.3% q/q in Q2 from 0.6% in Q1.

Should a GDP beat elude the UK, the policy rate may appear excessively tightened, potentially prompting a more accommodative stance by the BoE. The swaps curve indicates that the BoE is on track for 50 basis points of tightening to reach 4.25% within a year, which would result in the policy rate surpassing the BoE’s estimated neutral range of 2.00%-4.00% when the economy is underperforming relative to its potential.