Brown Brothers Harriman’s (BBH) Elias Haddad notes GBP/USD is challenging resistance at its 200-day moving average near 1.3434 as UK inflation remains well above the Bank of England's (BoE) 2% target. While markets now price about 60 bps of hikes over 12 months, Haddad argues BoE tightening expectations are still excessive given projected economic slack and a negative output gap capping long-term gilt yields.

Market pricing seen too aggressive on BoE

"GBP/USD is testing resistance at its 200-day moving average (1.3434). UK inflation remained sticky well above the BoE’s 2% target in February, leaving the bank with little room to look through the energy shock."

"Headline CPI printed at 3% y/y for a second straight month, which was in line with consensus and BoE projection. Core CPI unexpectedly rose 0.1pts to 3.2% y/y (consensus: 3.1%, BoE projection: 3.0%) and services CPI dipped less than anticipated to 4.3% y/y (prior: 4.4%, consensus: 4.2%, BoE projection: 4.1%)."

"The BoE stressed last week that a larger or more protracted energy shock, would require a more restrictive policy stance. Conversely, a short-lived shock or greater economic slack would tilt policy back toward easing."

"The UK swaps curve implies 60bps of hikes in the next 12 months, down from 100bps of hikes priced-in last week. BoE rate hike bets are still too rich in our view given excess slack in the economy."

"The BoE estimates a negative output gap of -1% of GDP in 2026, which puts a natural cap on runaway long-term gilt yields."

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