GBP: Resilience faces fiscal and growth risks – OCBC

OCBC strategists Sim Moh Siong and Christopher Wong highlight that the Pound (GBP) has been resilient since the Iran conflict, supported by a sharp hawkish shift in UK rate expectations. However, they see this repricing as excessive given slowing UK growth, energy-driven uncertainty and rising fiscal risks, and now expect a longer Bank of England (BoE) policy hold while turning more cautious on the GBP outlook.

Hawkish BoE bets seen overstretched

"GBP’s resilience reflects aggressive hawkish repricing, but the market’s shift looks overstretched against weakening growth, energy-driven uncertainty, and rising fiscal risks that leaves the GBP outlook less compelling."

"Despite being a net energy importer, the GBP has been one of the more resilient G10 currencies since the Iran conflict began, buoyed by a sharp hawkish shift in UK rate expectations."

"GBP held steady as slightly higher‑than‑expected UK CPI is unlikely to alter the Bank of England’s (BoE) policy path, which ultimately hinges on the scale and duration of the energy shock."

"Our expectation for a 3Q26 BoE rate cut now looks less assured, with an extended policy hold appearing more realistic. Still, the market’s aggressive hawkish repricing seems excessive given the UK’s slowing growth and the policy trade-offs that would emerge if energy prices stay elevated."

"Geopolitics has pushed domestic politics off the front page, but the energy shock and upcoming May local elections may raise the likelihood of more expansionary fiscal policy. These rising fiscal concerns leave us more cautious on the GBP outlook."

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