Why is the British Pound struggling when the BoE is considering rate hikes?

The British Pound (GBP) is struggling as mounting political uncertainty and deteriorating economic indicators complicate the United Kingdom's outlook.

Ahead of the key Gross Domestic Product (GDP) April data to be released on Friday, financial markets are balancing the risk of an economic contraction against the probability of further interest rate hikes by the Bank of England (BoE) to rein in energy-driven inflation. 

With internal political friction intensifying due to a high-stakes leadership challenge within the ruling Labour Party, major financial institutions are turning increasingly cautious on the Pound’s near-term trajectory.

Sluggish economic growth and fiscal concerns threaten to drag Pound lower

Macro strategists at Brown Brothers Harriman (BBH) warn that the combination of a potentially contracting UK economy and stagflationary pressures leaves the British Pound deeply exposed to a downward correction against the US Dollar. They emphasize that while anticipated central bank interventions may try to curb price pressures, structural damage to the UK's fiscal credibility from potential political reshuffling could rapidly worsen a currency undershoot.

We expect GBP/USD to fall to 1.3100, reflecting a stronger US growth outlook relative to the UK. BOE rate hikes in a sluggish growth, high inflation environment, is not bullish for GBP but should help cushion the downside.

Uncertainty over the next BoE moves

Economists at Societe Generale suggest that any near-term political noise surrounding Manchester Mayor Andy Burnham's bid for the Labour leadership will likely yield limited radical change. On the monetary front, they acknowledge that while hawkish voices within the BoE’s Monetary Policy Committee (MPC) are pushing hard for an immediate rate increase, the broader consensus will likely favor a more conservative wait-and-see strategy.

We expect these members [those opting for a rate hike] to remain in the minority and for the BoE to keep rates on hold in June.

Banks anticipate a downward-biased trajectory for the British Pound

The banks anticipate a soft trend for the British Pound. Brown Brothers Harriman maintains an explicitly bearish outlook, forecasting a drop to the 1.3100 mark for the GBP/USD pair as weak growth narratives underperform compared to the US economy. Meanwhile, Societe Generale highlights a more range-bound, anchored path where the currency lacks immediate upward momentum because the central bank is projected to keep interest rates on hold rather than following more aggressive tightening paths.

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)