Brown Brothers Harriman’s Elias Haddad (BBH) highlights downside risks for the Pound as UK GDP is expected to contract in Q2 and markets price further Bank of England (BoE) hikes due to second-round inflation effects. Haddad forecasts GBP/USD lower and warns that domestic politics, including the Makerfield by-election and potential leadership challenges, could exacerbate any Pound undershoot.

Soft growth and political risk pressure Sterling

"UK April GDP is due Thursday. Real GDP is expected to fall -0.1% m/m vs. +0.3% in March and track below the Bank of England’s (BOE) baseline Q2 forecast of +0.1% q/q. PMI data indicate UK real GDP could contract by -0.2% q/q in Q2."

"Nevertheless, the swaps curve implies 64bps of BOE rate hikes to between 4.25% and 4.50% in the next twelve months because of upside risk to second-round effects in price and wage-setting stemming from the energy shock. A first full 25bps BOE rate rise is priced-in for the September 17 meeting."

"We expect GBP/USD to fall to 1.3100, reflecting a stronger US growth outlook relative to the UK. BOE rate hikes in a sluggish growth, high inflation environment, is not bullish for GBP but should help cushion the downside."

"The UK political backdrop can amplify a GBP undershoot. Attention is increasingly shifting to the June 18 Makerfield by-election."

"Recent polls show Andy Burnham with a 10-point lead over Reform UK, potentially clearing a path for his return to parliament and a leadership challenge to Prime Minister Keir Starmer. A Burnham-led Labour government will likely lead to more spending and borrowing, worsening UK fiscal credibility."

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