The British Pound (GBP) is facing renewed pressure as softer-than-expected UK inflation data and reduced expectations for aggressive Bank of England (BoE) tightening weigh on the currency. According to Brown Brothers Harriman (BBH), GBP/USD is trading below 1.3400 after headline Consumer Price Index (CPI) dropped to a 13-month low of 2.8% year-over-year in April, compared to a consensus of 3.0% and the BoE's projection of 3.1%. This marks a decline from 3.3% in March, with housing and household services, particularly electricity and gas, contributing most to the decrease. Core inflation also fell to 2.5% year-over-year, the lowest since July 2021, versus 3.1% in March, while services CPI plunged to 3.2% year-over-year from 4.5% in March, both undershooting expectations and BoE projections [2].
The swaps curve has responded by trimming projected BoE tightening in the next twelve months to 66 basis points from 75 basis points. BBH notes that this is still too aggressive, given the BoE's estimate of a negative output gap between -1.5% and -1.7% of potential GDP in 2026. BBH sees scope for further downside in the Pound as rate expectations adjust and domestic political risks persist [2]. Rabobank's Senior FX Strategist Jane Foley echoes this sentiment, stating that the market is no longer confident the BoE will launch an aggressive rate hike program. Market pricing is now biased towards no change at the BoE's next policy meeting on June 18, with about 45 basis points of tightening priced in over a six-month horizon, down from expectations of up to four 25 basis point hikes earlier in the year [1].
Political uncertainty is also highlighted as a source of volatility for GBP. Rabobank points to the potential for Labour leadership changes, with the Makerfield by-election expected to take place on June 18, though this is not confirmed. If Labour candidate Burnham wins, he is expected to launch a leadership contest, possibly shifting the party to the soft left. Burnham has reassured markets he would adhere to the current Chancellor's fiscal rules, but Rabobank warns that both gilts and GBP are likely to remain jittery into the summer [1].
Additionally, the Financial Times reported that the UK Treasury is considering asking supermarkets to voluntarily cap food prices in exchange for regulatory relief. BBH criticizes this approach, arguing that the UK's underlying issue is weak productivity growth, which has averaged just 0.4% annually since the 2008 financial crisis, compared to 1.8% in the US [2].
Rabobank maintains a six-month EUR/GBP target of 0.88, expecting further choppy range trading around current levels, and notes that any further reduction in BoE rate hike expectations would add pressure to the Pound [1].
CONCLUSION
Softer UK inflation and diminished expectations for BoE tightening are weighing on the British Pound, with both Rabobank and BBH highlighting ongoing political uncertainty as a further source of volatility. Market participants should expect continued choppy trading in GBP, with risks skewed to the downside if rate hike expectations are further reduced.