British Pound: Retail rebound but BoE risks – BBH

Brown Brothers Harriman's Elias Haddad observes GBP/USD remaining close to April lows as UK August retail sales beat forecasts, prompting expectations of a November Bank of England rate hike. However, Haddad suggests the BoE may not require as much tightening as market pricing implies, leaving the Pound susceptible to a dovish reassessment.

GBP/USD is currently fluctuating near its lows of 1.3336. UK August retail sales exceeded expectations, with total retail sales volumes increasing 0.5% month-over-month (above consensus of -0.2%) and a 0.6% rise excluding automotive fuel (versus -0.2% consensus in July). This improved performance bolsters the likelihood of a 25 basis point BoE rate hike in November from 83% to 90%.

Nonetheless, BoE Governor Andrew Bailey indicated that a rate increase depends on sustained Middle East tensions and heightened risks of secondary effects. Swaps markets forecast roughly 100 basis points of BoE hikes within the next year, reaching 4.75%. The Bank of England likely does not need to tighten as much as anticipated, as the UK economy operates below full capacity, with Bank Rate at 3.75% nearing the upper limit of the BoE's neutral range of 2% to 4%, and fiscal policy set to become more restrictive. Consequently, GBP is vulnerable to a dovish BoE adjustment.