British Pound: BoE repricing risk grows – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad notes GBP/USD is trading heavy near its 200-day moving average as United Kingdom (UK) gilts stabilize. August Consumer Price Index (CPI) slightly exceeded the Bank of England's (BoE) projections, but he still expects the BoE to hold rates at 3.75%. Haddad argues aggressive market pricing reflects energy shocks and sees Sterling vulnerable to a dovish BoE repricing as the UK economy runs below capacity.

Hot CPI but BoE likely on hold

"GBP/USD is trading heavy, just above its 200-day moving average at 1.3455, while the selloff in gilts eased. UK August CPI report largely matched consensus but was hotter than the BoE’s projections."

"The BoE is widely expected to keep the policy rate at 3.75% for a sixth straight meeting tomorrow given contained UK inflation pressures and ongoing labor market slack. In the next twelve months, the swaps curve implies 100bps of BoE rate hikes to 4.75%."

"Nonetheless, the BoE may not need to tighten as much as markets expect. The UK economy is already operating below capacity, Bank Rate at 3.75% is near the top of the BoE’s estimated 2% to 4% neutral range, and fiscal policy will likely turn more restrictive. Bottom line: GBP is vulnerable to a dovish BoE repricing."