BoE: Risk of a sharp market correction has increased

The Bank of England's (BoE) Financial Policy Committee said in its quarterly report that the risk of a sharp market correction has increased, especially if expectations around AI become less optimistic and there is a "sudden or big change in perceptions of Fed independence" that could lead to a sharp repricing of US Dollar assets.

Key takeaways

"Equity valuations appear stretched, especially for tech companies focused on AI."

"Some backward-looking equity valuations are comparable to the peak of dot-com bubble."

"Material risk to UK is posed by global spillovers."

"UK households and businesses remain resilient despite higher cost of living, borrowing costs."

"Counter-cyclical capital buffer held at 2%."

"The UK banking system continues to have capacity to support the UK economy in a downturn."

"Risk managers more confident in stability of UK financial system than in H1."

"Cyber and geopolitical risks seen as most serious."

Market reaction

GBP/USD largely ignores this report and was last seen trading at 1.3410, losing 0.1% on a daily basis.