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British pound stays heavy versus dollar and euro after mixed UK CPI
GBP remains heavy as markets price 75 bps of BoE tightening over the next year, but BBH warns restrictive policy and fiscal concerns could shift expectations lower.
Brown Brothers Harriman said the British pound is trading heavy against both the US dollar and the euro after a mixed UK June CPI report, with headline inflation cooling while core and services inflation remain sticky.
According to Brown Brothers Harriman, headline UK inflation slowed to 2.6% year over year in June, cooling more than expected, but core CPI held at 2.6% for a second straight month and services CPI matched the BoE’s projection at 3.6% year over year.
Brown Brothers Harriman noted that swaps markets still price a full 25 bps BoE hike to 4.00% by November, implying 75 bps of tightening over the following twelve months, which would keep the policy rate above the BoE’s estimated neutral range of 2.00% to 4.00%.
The bank warned that if UK economic conditions are below potential, maintaining restrictive policy increases the risk of a downward adjustment to BoE expectations against the pound, and it also flagged fiscal credibility concerns tied to higher spending and borrowing.