Fiscal Risks Cap British Pound Upside Against US Dollar
The British Pound (GBP) may face challenges in appreciating against the US Dollar due to fiscal risks. Geoff Yu at BNY believes that the Bank of England (BoE) will maintain its current policy stance despite rising energy prices. According to Yu, markets have already tightened financial conditions, and the BoE's caution is driven by the UK's constrained fiscal space.
The new government has introduced initiatives aimed at providing fiscal relief, with a major package expected in early Q4. Raising tax thresholds is seen as the primary goal, which will help offset the effects of fiscal drag in recent years. Yu notes that current BoE pricing of around 42bp in tightening by year-end appears excessive but could still support GBP resilience.
The Monetary Policy Committee (MPC) is expected to focus on softer inflation rather than headline inflation risks. Governor Andrew Bailey continues to stress that wage growth is slowing, which may influence the MPC's decision-making process.