A just-published report updated our view on global financial markets and examined a number of timely investment issues. The U.K. pound was the focus in one section, and we re-iterated our underweight recommendation versus both the U.S. dollar and euro.
The pound remains weighed down by structural drags and failed to benefit from the BoE’s larger-than-expected 50 bps rate hike two weeks ago. The BoE faces a difficult choice, does it:
Taking the first option would eventually force the BoE onto the second pathway because inflation has become entrenched and most likely will not return to low levels absent a recession. To this end, unlike other DM economies, the U.K.’s core CPI rate has actually risen in recent months. The BoE will try to find a middle ground in the coming months, but there is little room to maneuver and the pound is likely to suffer as a consequence.