Brown Brothers Harriman’s Elias Haddad notes United Kingdom (UK) September Consumer Price Index (CPI) surprised to the upside, pushing British Pound (GBP) higher against both the Dollar and Euro. Haddad sees a 25 bps Bank of England (BoE) rate hike to 4.00% on November 5 as largely assured, but argues the swaps curve is pricing too much tightening, which they view as a headwind for Pound performance.

Pound supported by hot CPI

“GBP is up versus USD and EUR. UK September CPI inflation ran hot. A 25bps BoE policy rate hike to 4.00% on November 5 is pretty much a done deal.”

“Headline CPI rose to an 11-month high at 3.5% y/y vs. 3.1% in August, driven by higher motor fuel inflation, exceeding consensus (3.4%) and the BoE’s projection (3.0%). Core CPI matched expectations at 2.8% y/y vs. 2.6% in August, but services CPI rose 0.3ppt to a four-month high of 3.7% y/y, overshooting consensus (3.6%) and BoE projection (3.3%).”

“The swaps curve still implies 113bps of BOE tightening in the next twelve months. We see scope for less which is a headwind for GBP: (i) The UK economy is operating below capacity, (ii) virtually no real wage growth constrains spending, (iii) the policy rate is near the top of the BOE’s estimated 2% to 4% neutral range, and (iv) fiscal policy will likely turn more restrictive following the October 28 UK budget.”

“BoE Governor Andrew Bailey will have an opportunity to address the inflation overshoot during today’s fireside chat (2:00pm London, 9:00am New York).”