Pound Gains Limited by Widening Policy Gap Between Fed and BoE
The British Pound (GBP) continued its modest gains against the US Dollar (USD), trading near 1.3240 during early European hours on Thursday. However, the potential upside for the GBP/USD pair might be limited due to a widening policy gap between the hawkish Federal Reserve and the more cautious Bank of England.
The stronger-than-expected US Purchasing Managers Index (PMI) data, which rose to 58.4 in September from 56.0 in August, could boost the Greenback and act as a headwind for the GBP/USD pair in the near term. Federal Reserve officials, including Governor Michael Barr, have also signaled that further policy adjustments are likely needed to control inflation.
In contrast, the Bank of England is expected to raise interest rates twice over the next six months, according to Bank of America Global Research, amid higher energy prices and persistent inflation risks. Markets are pricing in a 67% odds of a BoE rate hike in November, with another increase expected in December.
Strategists at Brown Brothers Harriman question the market's aggressive Bank of England pricing, noting that the swaps curve implies about 100bps of BoE rate hikes in the next twelve months to 4.75%. They suggest that the BoE may not need to tighten as much as markets expect, given the UK economy's current operating below capacity and the Bank Rate at 3.75% being near the top of the BoE's estimated neutral range.