GBP is losing its appeal amid mixed BoE messaging – TDS

The Bank of England (BoE) has hiked by a further 25 basis points, though there are further signs that policymakers believe market rate hike expectations have gone too far. Economists at TD Securities expect reinforced weakness in the British pound.

The outlook is very soft

“The MPC delivered as broadly expected today with a 25bps hike and a promise of an update on active Gilt sales in August. Macro forecasts based on the yield curve were downgraded sharply, with the MPC expecting 10% inflation in 2022 and negative GDP growth in 2023, sending a strong signal to markets that the anticipated rate path is too high.”

“BoE outlook illustrates the fears of rising stagflation risks, raising questions about the terminal rate priced into markets. As a result, we think that GBP is losing its appeal.”

“We note that GBP also suffers from the broader European stagflationary pressures gripping the EUR. While the EUR's stagflation risks are arguably higher, it also has more room to reprice growth and rates higher. We continue to like EUR/GBP higher as a broader forecasting theme, so we will look to use dips as buying opportunities.” 

“GBP's one bright spot lies in stretched market positioning and tactical valuations. It's the most oversold G10 currency, and HFFV sits at 1.2787, leaving it ripe for a short-term correction. Yet that is a move we would look to fade.”