MUFG’s Derek Halpenny highlights the Pound’s resilience, with data-supported expectations of Bank of England tightening keeping GBP steady versus the US Dollar since June. However, rising consumer credit, increasing defaults, survey evidence of household vulnerability, and excessive OIS pricing for 100bps of hikes by next September leave the Pound exposed if UK rates reprice lower.

GBP supported yet vulnerable on rates

“The pound continues to show resilience with economic data reinforcing expectations of monetary tightening by the BoE. The pound is roughly unchanged versus the US dollar since the end of June with only the energy-related CAD and NOK outperforming and the yen, helped by yen buying intervention by the MoF, with assistance from the US. So the pound has done well on the back of improving sentiment and evidence of economic resilience.”

“The BoE’s quarterly Credit Conditions Survey released earlier this month revealed an increase in defaults on credit card debt for the sixth consecutive quarter underlining the increased strains on UK consumers. Despite this these exposures are increasing with consumer credit up GBP 2.5bn in August to a new record high. If rates remain around these levels, it’s very likely that these figures will deteriorate further in the final quarter of the year.”

“So while the backdrop of the economic data has been positive, the outlook does point to increasing risks. The OIS market indicates 100bps of tightening is priced by next September and we continue to doubt the BoE delivering that, especially following the comments from Chief Economist Huw Pill who stated this week that he is sceptical that the UK will require four 25bp rate hikes. But it will be difficult for the markets to adjust lower given the global backdrop of higher rates.”

“But in circumstances of a broader move back lower in rates, UK rates could fall more notably. The pound remains vulnerable to signs that recent economic resilience could be undermined by the notable move higher in yields.”