British Pound: BoE repricing risk grows – BBH

Brown Brothers Harriman analyst Elias Haddad observes the GBP/USD currency pair is trading near its 200-day moving average, while UK gilts demonstrate stability. The UK's August Consumer Price Index (CPI) marginally surpassed the Bank of England's (BoE) expectations, although Haddad anticipates the central bank to maintain interest rates at 3.75%.

The aggressive market pricing appears to be driven by energy shocks, and Haddad believes the Sterling could be susceptible to a dovish BoE repricing as the UK economy operates below full potential. The GBP/USD is presently trading slightly above 1.3455, while the gilt sell-off has subsided. The Bank of England is anticipated to keep the policy rate at 3.75% for the sixth consecutive meeting, given subdued inflation pressures and persistent labor market slack.

Over the next year, the swaps curve suggests 100 basis points of BoE rate hikes, reaching 4.75%. However, the BoE might not necessitate as much tightening as markets anticipate. The UK economy is already functioning below capacity, Bank Rate is close to the upper limit of the BoE's estimated 2% to 4% neutral range, and fiscal policy will likely adopt a more restrictive stance. In conclusion, the GBP is at risk of a dovish BoE repricing.