BNY Mellon’s Geoff Yu notes that reduced Bank of England (BoE) tightening expectations are not undermining the British Pound (GBP). He argues that BoE flexibility around its mandate and reluctance to overreact to supply shocks is not hurting GBP, with consistent domestic Gilt demand and positive real rates offset by international concerns about United Kingdom (UK) growth and politics.

Rate repricing leaves Pound resilient

“In the U.K. and GBP’s case, whether rates are the dominant driver is questionable, given the volume of political noise still weighing on the economy. Bank of England (BOE) Governor Andrew Bailey has credited market rate moves with “doing the tightening for the BOE” and appears clearly skeptical of using further hikes to address a supply shock.”

“Compared with the ECB, we believe the BOE’s flexibility around its price stability mandate is a deliberate choice that isn’t currently damaging the currency.”

“The Monetary Policy Committee can’t fix the U.K.’s structural issues, but it can avoid making them worse. Asset allocation to the U.K.’s equity market differs greatly from the Eurozone due to global exposures.”

“Energy-driven supply shocks could even prove beneficial to GBP on the margins. Gilt yields also matter, but our flow data show that domestic purchases have been highly consistent due to positive real rates.”

“It’s the international component that’s currently limiting GBP’s potential, mostly due to concerns over potential growth and politics.”

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