Scotiabank strategists Shaun Osborne and Eric Theoret report the British Pound (GBP) is slightly higher versus the US Dollar (USD) but lagging most G10 peers. Markets are discounting strong United Kingdom (UK) retail sales and Purchasing Managers' Index (PMI) surprises ahead of next week’s expected Bank of England (BoE) hawkish hold. Rate markets price modest tightening by September and November, while options show renewed demand for downside protection in GBP.

BoE expectations and politics temper Pound

"Market participants are clearly not responding to fundamentals and ignoring the release of (far) stronger than expected retail sales data for June alongside a solid surprise to the preliminary PMI’s for July – the latter offering decent levels of expansion in manufacturing (52.8) while also delivering an unexpected recovery out of (sub-50) contraction in services with a print of 51.8."

"The data are important heading into next Thursday’s BoE, where a hawkish hold is expected to be delivered alongside a fresh set of forecasts. The rate path is currently priced for 16bpts of tightening in September and 32bpts for November, offering the potential for near-term upside if policymakers seek to firm up expectations for a hike at the next meeting."

"The options market appears to be signaling a renewed demand for protection against GBP weakness, with a clear turn from last Wednesday’s local peak. The catalyst is likely a combination of geopolitics and domestic political concerns, both generating a meaningful increase in UK government bond yields and threatening the UK’s overall fiscal situation."

"Neutral—the RSI remains close to neutral as the GBP softens back toward the midpoint of its range from mid-June. Local support is found at 1.3150 with resistance at 1.3550. We had anticipated some nearer support closer to 1.3350 but now look to 1.3300 as a limit to short-term weakness."

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