Brown Brothers Harriman’s Elias Haddad notes the British Pound (GBP) remains heavy versus the US Dollar (USD) and Euro (EUR) after a mixed United Kingdom (UK) June Consumer Price Index (CPI) report, with headline inflation cooling but core and services measures still sticky. Markets price 75 bps of Bank of England (BoE) tightening over twelve months, yet Haddad warns restrictive policy in a below‑potential UK economy and fiscal concerns under Andy Burnham could prompt a downward shift in BoE expectations against GBP.

Restrictive BoE stance weighs on Pound

"GBP continues to trade heavy versus USD and EUR. UK June CPI report was mixed. Headline inflation cooled more than expected to 2.6% y/y (consensus: 2.7%, BoE projection: 3.1%) vs. 2.8% in May on lower motor fuels."

"Core CPI printed at 2.6% y/y for a second straight month, a tick higher than anticipated (consensus: 2.5%). Services CPI matched the BoE’s projection at 3.6% y/y vs. 3.7% in May but tracked higher than consensus of 3.5%. Cooling wage growth signal softer services inflation ahead."

"The swaps curve price in a full 25bps BoE rate hike to 4.00% in November and a total of 75bps of tightening in the next twelve months. That would leave the policy rate above the BoE’s estimated neutral range (2.00%-4.00%)."

"Restrictive monetary policy when the UK economy is operating well below potential raises the likelihood of a downward adjustment to BoE rate expectations against GBP. Moreover, the prospect of higher spending and borrowing under Prime Minister Andy Burnham risks worsening UK fiscal credibility and is a drag on GBP."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)