British Pound: Retail rebound but BoE risks – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad notes GBP/USD is holding just above recent lows as UK August retail sales beat expectations, reversing July’s decline and firming market pricing for a November Bank of England (BoE) rate hike. However, Haddad argues the BoE may not need as much tightening as implied by swaps, leaving Pound vulnerable to a dovish repricing.

Pound exposed to BoE repricing

"GBP/USD is consolidating just above yesterday’s lows of 1.3336. UK August retail sales surprised to the upside, reversing July’s decline. Total retail sales volumes increased 0.5% m/m (consensus: -0.2%) vs. -0.5% in July. Excluding automotive fuel, retail sales were up 0.6% (consensus: -0.2%) vs. -0.9% in July."

"The data firmed up odds of a 25bps BoE rate hike in November to as much 90% from 83%. Still, BoE Governor Andrew Bailey flagged yesterday that a rate hike hinges on whether “the Middle East persists for an extended period, as appears to be the case, and the risk of second-round effects emerging increases.”"

"The swaps curve continues to imply about 100bps of BoE rate hikes in the next twelve months to 4.75%. In our view, the BoE may not need to tighten as much as markets expect. The UK economy is already operating below capacity, Bank Rate at 3.75% is near the top of the BoE’s estimated 2% to 4% neutral range, and fiscal policy will likely turn more restrictive.

"Bottom line, GBP remains vulnerable to a dovish BoE repricing."