British Pound Faces Fiscal Risks Amid Energy Price Pressures

The British Pound (GBP) may face fiscal risks that cap its upside against the US Dollar, according to Geoff Yu at BNY. Despite energy-driven price pressures, Yu believes the Bank of England (BoE) will keep policy unchanged as markets have already tightened financial conditions.

Yu sees the United Kingdom's constrained fiscal space and potential tax-threshold relief as key for demand and gilt supply. He notes that current BoE tightening is priced by markets as excessive but still supportive for GBP resilience.

The BoE is not expected to shift its policy stance this week, with Governor Andrew Bailey stressing that the market is already doing the tightening for them. Mortgage rates have already rebounded significantly due to the recent rise in swap rates, and any reversal process would be asymmetric and unlikely to be swift.