Brown Brothers Harriman’s (BBH) Elias Haddad reports GBP/USD is trading below 1.3400 after United Kingdom (UK) inflation undershot expectations, easing pressure on the Bank of England (BoE). The swaps curve has reduced projected BoE tightening, which the bank still deems too aggressive, and sees room for further downside in the Pound as rate expectations adjust and domestic political risks persist.

Cooling prices temper BOE tightening path

"GBP/USD is holding under 1.3400. UK inflation cools more than expected in April, giving the BOE some breathing room. Headline CPI dropped to a 13-month low at 2.8% y/y (consensus: 3.0%, BOE projection: 3.1%) vs. 3.3% in March. Housing and household services (principally electricity and gas) made the largest downward contribution to the headline CPI."

"Core inflation fell to 2.5% y/y (consensus: 2.6%), the lowest since July 2021, vs. 3.1% in March, while services CPI plunged to 3.2% y/y (consensus: 3.5%, BOE projection: 3.4%) vs. 4.5% y/y in March."

"The swaps curve trimmed BOE rate hike expectation in the next twelve months to 66bps from 75bps. That’s still too aggressive given the BOE estimates a negative output gap between -1.5% and -1.7% of potential GDP in 2026. Bottom line: scope for a downward adjustment to the UK swaps curve alongside domestic political uncertainty, can further undermine GBP."

"The Financial Times reported the UK Treasury was considering asking supermarkets to voluntarily cap prices on food in exchange for regulatory relief."

"Turning to 1970s style price controls misses the root problem. Virtually non-existent UK productivity is the real ailment. Since 2008 global financial crisis, UK labor productivity has grown at an annual rate of 0.4% vs. 1.8% in the US."

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