MUFG’s Derek Halpenny argues that strong United Kingdom (UK) credit and mortgage data, alongside elevated UK front-end yields, support the case for further Bank of England (BoE) tightening. He highlights Megan Greene’s hawkish stance, a potential July rate hike, and notes that higher UK yields should aid the British Pound (GBP), particularly against the Euro (EUR), though domestic political and fiscal risks may limit gains.

BoE hike risk and MPC divisions persist

"We continue to see grounds for the BoE hiking and suspect that Megan Greene’s views will grow in popularity the longer the Strait of Hormuz remains closed. Based on this speech there is certainly a risk that Megan Greene could join Chief Economist Huw Pill in voting for a 25bp hike at the next meeting on 18th June."

"A hike certainly seems unlikely in June based on Bailey’s comments but if uncertainty persists much longer it appears likely that the MPC will vote to hike on 30th July. That is currently only priced as a 50-50 prospect so there is scope for market yields to move higher, especially at the front-end."

"All else equal that should provide support for the pound, more against the euro where monetary policy pricing looks more realistic than potentially in the US. Political and associated fiscal uncertainties though could still get in the way of any rate driven pound strength."

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