British Pound: Soft GDP could trigger dovish BoE repricing – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad argues that the British Pound (GBP) requires a stronger-than-expected United Kingdom (UK) Gross Domestic Product (GDP) print to gain upside traction. Haddad expects UK real GDP growth to slow in Q2, with consumption easing as tighter financial conditions and weaker real income growth weigh on demand, leaving current market pricing for 50 bps of additional Bank of England (BoE) tightening vulnerable to dovish repricing if data disappoints.

Growth slowdown threatens BoE pricing

"UK real GDP growth to slow in Q2 (Thursday). Consensus is for real GDP to rise 0.4% q/q vs. 0.6% in Q1."

"The Bank of England (BoE) projects a softer print of 0.3% q/q as lower household real income growth, and tighter financial conditions weigh on domestic demand activity. The BoE forecasts consumption growth to ease to 0.3% q/q in Q2 vs. 0.6% in Q1."

"As such, absent a GDP beat, UK rate pricing looks vulnerable to a dovish repricing against GBP."

"The swaps curve continues to imply 50bps of BoE tightening to 4.25% in the next twelve months. That would leave the policy rate above the BoE’s estimated neutral range (2.00%-4.00%) when the UK economy is operating well below potential."