Brown Brothers Harriman flagged downside risks for Sterling as UK activity data soften while rate expectations remain elevated. April GDP is due on Thursday, with real output forecast to slip by 0.1% m/m after a 0.3% rise in March, and the reading would sit below the Bank of England’s baseline Q2 projection of 0.1% q/q. PMI signals also point to a Q2 contraction of 0.2% q/q, a backdrop that could weigh on GBP/USD; BBH’s forecast is 1.3100.
Policy pricing, however, is still geared to further tightening. The swaps curve implies 64bps of BoE increases over the next 12 months, taking Bank Rate to a 4.25%–4.50% range, and a full 25bps move is priced for the 17 September meeting. Domestic politics may add volatility, with focus turning to the 18 June Makerfield by-election; polls show Andy Burnham 10 points ahead of Reform UK.
UK Economic Outlook and Sterling Weakness
We see downside risks for the Pound as it is caught between slowing growth and stubborn inflation. The UK economy is expected to contract in the second quarter, which contrasts sharply with a more resilient growth outlook in the United States. This divergence creates a challenging environment for Sterling.
This Thursday’s April GDP release is a key event, with forecasts suggesting a -0.1% month-on-month contraction that would support views of a broader slowdown. Recent PMI data reinforces this, indicating that UK real GDP could shrink by as much as 0.2% for the entire second quarter. This weak economic footing makes it difficult to be bullish on the currency.
BoE Policy, Political Risks, and Strategic Positioning
Despite poor growth, we see the Bank of England being forced to hike rates further to combat inflation, with swaps markets pricing in the first full 25 basis point rise for the September 17 meeting. The latest UK services inflation figures remain stubbornly high at 5.9%, which will keep pressure on the central bank. Raising rates into a contracting economy is not a source of strength for the Pound.
Political risk is also a major factor, with the Makerfield by-election on June 18 now in focus. The prospect of a leadership challenge introduces uncertainty, and any shift towards a looser fiscal policy could damage the UK’s financial credibility. We only have to look back to the market reaction during the 2022 mini-budget to see how quickly traders punish perceived fiscal irresponsibility.
Given these factors, we are looking at strategies that benefit from a falling GBP/USD and increased volatility. Buying put options on the Pound offers a clear way to position for a move towards our 1.3100 target. This approach allows for defined risk while capturing potential downside driven by the upcoming economic data and political events.
