GBP/USD: Stagflation risks grow on flat UK GDP – BBH

FXStreet Insights Team FXStreet

Brown Brothers Harriman’s (BBH) Elias Haddad reports that GBP/USD has dropped below 1.3300 and remains vulnerable after UK GDP unexpectedly stalled in January. Zero monthly growth leaves output below the Bank of England’s Q1 projection. Stagnating activity ahead of an energy-driven inflation shock raises stagflation risks and has flipped UK rate pricing from cuts to a small net tightening by year-end.

Flat growth and shifting BOE expectations

"GBP/USD plunged under 1.3300 and vulnerable to more downside. The UK economy unexpectedly showed no growth in January. Real GDP was 0.0% m/m (consensus: 0.2%) vs. 0.1% in December with services output flat, production down -0.1% and construction up 0.2%."

"Real GDP is undershooting the Bank of England’s (BOE) Q1 0.3% q/q projection."

"Stagnating UK growth is not a good sign ahead of the energy-driven supply shock to inflation."

"That raises stagflation risks and puts the BOE in a difficult policy bind which is already reflected in the sharp upward adjustment to UK rate expectations."

"The UK swaps curve has swung from pricing a full 50bps of cuts by year-end on February 27 to nearly 25bps of hikes currently."

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

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