Elias Haddad (BBH) from Brown Brothers Harriman emphasizes the risk of deterioration of the pound due to the expected decline in UK GDP in the second quarter and markets pricing in further Bank of England (BoE) increases due to the effects of the second round of inflation. Haddad forecast a decline in the GBP/USD parity and warned that domestic politics, including a Makerfield by-election and potential leadership challenges, could worsen the situation if the pound weakens.

Soft growth and pressure on political risk sterling

“UK April GDP is due on Thursday. Real GDP is expected to contract by -0.1% m/m compared to +0.3% in March and is lower than the Bank of England’s (BOE) second quarter headline forecast of +0.1% q/q. PMI data indicates UK real GDP could fall by -0.2% q/q in Q2.”

“Nonetheless, the swap curve implies BOE rate increases of 64 basis points to 4.25% to 4.50% over the next twelve months due to second-round price and wage setting rate increases arising from the energy shock. The first full BOE rate increase of 25 basis points is priced in at the September 17 meeting.”

“We expect GBP/USD to fall to 1.3100, reflecting improved growth prospects in the US compared to the UK. BOE interest rate increases in an environment of slow growth and high inflation are not optimistic for GBP, but should help mitigate the negative effects.”

“The UK political backdrop may exacerbate GBP undervaluation. Attention is increasingly turning to the Makerfield by-election on June 18.”

“The latest polls show Andy Burnham has a 10-point lead on UK reform, potentially clearing the way for him to return to parliament and presenting a leadership challenge to Prime Minister Keir Starmer. A Labor government under Burnham is likely to lead to more spending and borrowing, damaging the UK’s fiscal credibility.”

(This article was created with the support of an artificial intelligence tool and has been reviewed by an editor.)