MUFG’s Lee Hardman highlights that the Pound (GBP) has outperformed, pushing EUR/GBP to new lows as markets price a more hawkish Bank of England (BoE) stance on the back of stronger United Kingdom (UK) growth and sticky inflation. However, he warns that rising domestic political risks around Prime Minister Starmer’s leadership could trigger at least a temporary Pound sell-off in coming weeks.

BoE support versus UK political risks

“The pound outperformed last week resulting in EUR/GBP falling to a fresh low overnight of 0.8649.”

“The pound has been supported by the hawkish repricing of BoE rate hike expectations encouraged by further evidence of stronger UK growth momentum at the start of this year while underlying inflation pressures remained uncomfortably high at the start of the energy price shock.”

“We expect a hawkish hold this week with two MPC members Chief Economist Pill and MPC member Mann voting for a hike.”

“Support for the pound from higher UK rates is currently offsetting headwinds from higher energy prices while the UK economy is holding up, and domestic political risks ahead of the local elections.”

“Domestic political developments have the potential to trigger at least a temporary sell-off for the pound in the coming weeks.”

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