Pound: Resilient Performance, but BoE Pricing Overstretched – MUFG

Sterling has shown surprising resilience in recent sessions despite multiple pressures, but MUFG analyst Derek Halpenny warns that market pricing for further Bank of England monetary policy tightening may be overstretched. At the time of writing, GBP/USD was trading around 1.33315, having remained broadly stable against the dollar since June.

**Economic resilience underpins hawkish BoE expectations**

UK economic fundamentals provide key support for sterling. According to the MUFG report, UK GDP data for both Q1 and Q2 were revised higher, and BoE staff have also upgraded their economic outlook. This growth resilience, combined with sticky inflation, keeps the market pricing in BoE rate hike prospects. Morgan Stanley has recently adjusted its forecast, now expecting 25 basis point rate hikes from the BoE in November and February next year, noting that fiscal policy will be a key potential catalyst for further tightening. The market currently prices in roughly an 80% probability of a BoE rate hike in November.

**Easing dollar-side pressures offer rebound room**

Sterling's stability also benefits from a loosening of the dollar-supportive narrative. The US 10-year Treasury yield has pulled back from its highest levels since 2002, weakening the dollar's yield differential appeal. Meanwhile, the University of Michigan's preliminary October consumer sentiment index plunged to a five-month low of 46.3, with the current economic conditions sub-index falling to an all-time low of 44.7, while one-year inflation expectations rose to 4.7%. This combination of "deteriorating confidence + rising inflation expectations" has prompted subtle adjustments in market assessments of the Fed's policy path, providing rebound room for non-USD currencies like sterling.

**Potential risks from overstretched pricing**

Despite sterling's gains ranking among the top in the G10, MUFG analyst Halpenny still warns that market pricing for BoE tightening may be excessive. The core tension lies in the fact that elevated inflation provides sterling with a "hawkish central bank premium" in the near term, but if economic growth continues to weaken, current aggressive rate hike pricing will face a correction. Additionally, ongoing geopolitical tensions in the Middle East provide a buffer for dollar safe-haven demand, keeping traders restrained in heavily shorting the dollar, which also limits sterling's further upside room.