British Pound: Rally against EUR and USD unlikely to last – TD Securities

TD Securities FX strategist Howard Du highlights that GBP/USD initially rose 0.3% on the hawkish 6-3 BoE vote split, with Mann joining the hike camp. However, the rest of the committee appears comfortable holding rates given limited second-round effects. They advise fading the short-term British Pound (GBP) strength versus Euro (EUR) and US Dollar (USD), expecting EUR/GBP to move back toward 0.86 as United Kingdom (UK) political risk premium rebuilds.

BoE reaction and GBP cross outlook

"The BoE voted to keep rates on hold in a 6-3 vote split with Mann also joining the rate hike camp. This was not the market consensus but many forecasters including ourselves have flagged this as a risk."

"GBP/USD was +0.3% in knee-jerk reaction to the slightly more hawkish vote split; the size of the initial price action was in-line with our expectation for GBP under the hawkish scenario for this meeting."

"Other than the vote split, it would appear to us the rest of the committee is still very comfortable keeping rates on hold, given the lack of clear second-round effects observed in inflation data."

"We think the knee-jerk GBP rally should be faded vs the EUR and USD. Further paring back of September BoE rate hike pricing could weigh on GBP."

"The broad USD uptrend should stay in place until US data starts to soften; we also expect EUR/GBP to retrace back toward 0.86 in the coming months as the UK political risk premium rebuilds into the Autumn Budget."