Rabobank's Senior FX Strategist Jane Foley note that reduced expectations for aggressive Bank of England (BoE) tightening are weighing on the British Pound (GBP), even as recent United Kingdom (UK) labour and Consumer Price Index (CPI) data have eased market nerves. The bank highlights political uncertainty around potential Labour leadership changes and maintains a 6‑month EUR/GBP target of 0.88, expecting further choppy range trading around current levels.

BoE repricing and politics weigh

"The market is no longer so confident that the BoE is on the cusp of launching an aggressive programme of interest rate hikes. The BoE’s next policy meeting is scheduled for June 18 and currently market pricing is biased towards the risk of no change on this date, although about 45 bps of tightening is priced in on a 6-month view. At one point towards the start of the Iran war, market pricing was pointing to the risk of as many of four 25 bps rate hikes this year."

"On one hand, the prospect of fewer BoE rate hikes is a GBP negative factor. However, the pound has backtracked from this month’s weakest levels vs. both the EUR and the USD in part due to assurances from potential Labour leadership contender Burnham regarding the current Chancellor’s fiscal rules. We see scope for further choppy range trading in EUR/GBP around current levels and maintain a 6-month target of 0.88."

"While any further winding back of BoE rate rise expectations would pressure the pound, UK politics has the potential to create further volatility for GBP. The Makerfield by-election is expected to take place on June 18, though this is not confirmed. If Labour candidate Burnham wins, he would be expected to launch a leadership contest which could result in a move to the soft left for the Labour party."

"While Burnham has reassured the market that he would stick to the current fiscal rules, both gilts and GBP are likely to be jittery into the summer."

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