British Pound: Upside constrained by Budget and BoE expectations – OCBC

Substantial BoE tightening is already priced in. OCBC’s Sim Moh Siong and Christopher Wong say resilient UK growth and contained fiscal risks have helped the British Pound (GBP) hold up better than anticipated. Ahead of Wednesday’s Budget, markets remain relaxed. In their view, further GBP outperformance depends on a credible fiscal buffer and sustained economic resilience, leaving an increasingly high hurdle for additional gains.

Pound Outlook Hinges on Fiscal Prospects and BoE Pricing

"GBP has held up better than expected despite the fiscal challenges posed by higher energy costs. Markets remain relatively relaxed about UK fiscal risks ahead of Wednesday’s Budget."

"A Budget that preserves a meaningful fiscal buffer while maintaining a credible tightening path should keep the UK fiscal risk premium contained. That, together with continued foreign demand for gilts, would remain supportive for GBP."

"The domestic backdrop has also improved. The UK composite PMI rose to 53.1 in October from 52.0, its strongest reading since February, with new orders accelerating and employment returning to growth."

"This resilience, alongside comparatively softer euro-area momentum and lingering French sovereign concerns, supports GBP against EUR through a relatively more hawkish BoE outlook."

"Still, we would be cautious about chasing GBP higher. Markets already price an aggressive BoE tightening cycle, well beyond our base case of just one insurance hike by year-end."

"With substantial tightening already discounted, the bar for further GBP outperformance looks increasingly high."

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