British Pound underperforms this week as experts doubt BoE tightening prospects

British Pound (GBP) struggled this week as market experts questioned the Bank of England's (BoE) plans for interest rate hikes, according to a recent report. The GBP experienced a decline of 1.27% against the US Dollar (USD) during the European trading session, trading at approximately 1.3220. Despite this, the British currency managed to remain slightly higher than its three-month low of 1.3200 throughout the week.

The GBP underperformed against major currencies this week, notably trailing the US Dollar, as shown in the provided heat map. Analysts at Brown Brothers Harriman (BBH) attributed the underperformance to a discrepancy between market pricing and the BoE's anticipated policy path. They noted that the swaps curve suggests around 100 basis points of BoE rate hikes in the next year, with the Bank Rate currently at 3.75%, nearing the upper limit of the BoE's estimated 2% to 4% neutral range.

Furthermore, the UK economy is reportedly operating below its full capacity, and fiscal policy is expected to become more restrictive, all of which indicate a reduced need for aggressive tightening than currently implied by markets. Meanwhile, the USD outperformed the GBP this week due to increased hawkish Federal Reserve (Fed) expectations, spurred by concerns about high inflation and stronger-than-anticipated US S&P Global Purchasing Managers' Index (PMI) data for September.

The CME FedWatch tool indicates a 58% probability of a Fed rate hike in the remaining policy meetings of the year. The GBP/USD pair currently trades at 1.3224, maintaining a bearish outlook as it stays below the 20-day Exponential Moving Average (EMA) of 1.3402. This suggests that sellers continue to dominate the market, even though the Relative Strength Index (RSI) has slipped into oversold territory, indicating potential downward momentum.