OCBC’s Sim Moh Siong and Christopher Wong note that the British Pound (GBP) has been more resilient than expected as UK growth holds up and fiscal risks stay contained. Markets remain relaxed ahead of Wednesday’s Budget, but substantial BoE tightening is already priced. They argue that further GBP outperformance requires a credible fiscal buffer and continued economic resilience, making the upside bar increasingly high.
Fiscal outlook and BoE pricing shape Pound prospects
“GBP has held up better than expected despite the fiscal challenges posed by higher energy costs. Markets remain relatively relaxed about UK fiscal risks ahead of Wednesday’s Budget.”
“A Budget that preserves a meaningful fiscal buffer while maintaining a credible tightening path should keep the UK fiscal risk premium contained. That, together with continued foreign demand for gilts, would remain supportive for GBP.”
“The domestic backdrop has also improved. The UK composite PMI rose to 53.1 in October from 52.0, its strongest reading since February, with new orders accelerating and employment returning to growth.”
“This resilience, alongside comparatively softer euro-area momentum and lingering French sovereign concerns, supports GBP against EUR through a relatively more hawkish BoE outlook.”
“Still, we would be cautious about chasing GBP higher. Markets already price an aggressive BoE tightening cycle, well beyond our base case of just one insurance hike by year-end.”
“With substantial tightening already discounted, the bar for further GBP outperformance looks increasingly high.”
