British Pound: Are BoE tightening expectations justified? – BBH

Broad Dollar strength is weighing on GBP/USD despite better-than-expected UK PMI readings reinforcing expectations of a 25 bps BOE rate increase to 4.00% in November, according to Elias Haddad at Brown Brothers Harriman. In his view, the swaps market is pricing in too much further tightening. He points to below-capacity growth, weak real wages, a policy rate close to neutral and likely fiscal restraint as factors weighing on the Pound.

Why Is the Pound Under Pressure Despite Strong PMI?

"GBP/USD is down on broad USD strength while EUR/GBP dropped to its lowest level since May 2025. UK October PMI beat expectations, cementing bets on a 25bps BOE policy rate hike to 4.00% on November 5."

"The composite PMI improved to an eight-month high at 53.1 (consensus: 51.7) vs. 52.0 in September, driven by faster services and manufacturing growth."

"Over the next twelve months, the swaps curve still implies over 100bps of BOE tightening."

"We see scope for less which is a headwind for GBP: (i) The UK economy is operating below capacity, (ii) virtually no real wage growth constrains spending, (iii) the policy rate is near the top of the BOE’s estimated 2% to 4% neutral range, and (iv) fiscal policy will likely turn more restrictive following the October 28 UK budget."

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