GBP Faces Uphill Battle Despite Excessive Tightening Expectations

Geoff Yu at BNY Trading believes that despite renewed price pressures from energy, the Bank of England (BoE) is unlikely to shift its policy stance this week. According to Yu, markets have already tightened financial conditions, and mortgage rates have rebounded significantly due to a recent rise in swap rates.

The BoE's caution is partly due to the UK's constrained fiscal space, which may limit their ability to implement more aggressive monetary policies. However, the new government has launched initiatives that reflect fiscal relief, including raising tax thresholds as the main goal to offset the effects of fiscal drag in recent years.

Yu also believes that current BoE pricing of around 42bp in tightening by year end looks excessive but still supportive for British Pound (GBP) resilience. He expects the BoE to hold rates at 3.75%, with at most two dissents, and notes that although headline inflation risk has picked up, the Monetary Policy Committee is more focused on softer inflation.