Brown Brothers Harriman’s (BBH) Elias Haddad argues that United Kingdom (UK) July Gross Domestic Product (GDP), expected flat month-on-month, is unlikely to alter Bank of England (BoE) expectations. The swaps curve implies 75 bps of tightening to 4.50%, which Haddad deems too aggressive, warning this leaves British Pound (GBP) exposed to a dovish BoE repricing given the negative output gap, above-midpoint policy rate and prospects for tighter fiscal policy.

Market pricing seen too aggressive

“UK July GDP is due Friday but is unlikely to shift the dial on Bank of England (BOE) rate expectations. Real GDP is expected at 0.0% m/m vs. +0.3% in June, as July’s decline in retail sales volumes offset an improvement in the composite PMI. For reference, the BoE’s baseline Q3 forecast is 0.1% q/q.”

“The swaps curve implies 75bps of BOE rate hikes in the next twelve months to 4.50%. That’s too aggressive in our view and leaves GBP vulnerable to a dovish BoE repricing.”

“The UK’s negative output gap, a policy rate above the mid-point of the BoE’s 2% to 4% neutral range estimate and the prospect of tighter fiscal policy all argue for a less aggressive hiking cycle.”

“UK Chancellor John Healey has pledged to build a solid fiscal “buffer against uncertainty” in the October 28 Budget. That points to a mix of tax rises and spending cuts as higher borrowing costs are estimated to have halved the government’s fiscal headroom to around £12bn.”