British Pound: BoE hikes not seen bullish – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad highlights that United Kingdom (UK) May Gross Domestic Product (GDP) slightly beat expectations, driven by services, but underlying details disappointed as production and construction contracted and growth relied on one subsector. Markets fully price 50 bps of Bank of England (BoE) tightening over twelve months, yet rate hikes in a sluggish growth and high inflation backdrop are viewed as not bullish for the British Pound (GBP), with GBP/USD resistance at 1.3600.

Sluggish growth limits Pound upside

"The growth in May was because of a 0.3% rise in services and was partially offset by falls of -0.5% in production, and -0.8% in construction. Disappointingly, the strength in services activity was largely driven by a single subsector - professional, scientific and technical activities – which contributed 0.16ppt to real GDP growth."

"The swaps curve continues to fully price in a 25bps BOE rate rise to 4.00% in November and a total of 50bps of tightening in the next twelve months because inflation is proving sticky. BOE rate hikes in a sluggish growth and high inflation environment is not bullish GBP."

"Moreover, the prospect of higher spending and borrowing under incoming Prime Minister Andy Burnham argues against a sustained rally in GBP. GBP/USD next resistance is offered at 1.3600."

"GBP is consolidating yesterday’s broad-based gains driven by investors relief that former frontrunner Ed Miliband is unlikely to become the next Chancellor of the Exchequer. Miliband is seen as the least market-friendly choice."

"UK May GDP beat expectations, but the details underwhelm. Real GDP unexpectedly rose 0.1% m/m in May (consensus: 0%) vs. -0.1% in April, tracking the Bank of England’s (BOE) baseline Q2 forecast of +0.1% q/q."

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