For some time, we have seen gilt yields and spot FX detached from each other, this is a different dynamic to what has been a historical driver of FX markets
Despite the richness in rates, risk premium is pressuring sterling from rallying against peers. The BoE is the top most aggressive bank in our tracking list, however, rates are not attracting GBP bulls. U.K. 30-yr yield has seen a rise of 40bps during September
The U.K. 5-yr credit default swap has also seen a rise over the last couple of months, insurance in U.K. sovereign debt is now at the highest since mid-2020. U.K. CDS have jumped +5.0bps in this month alone, U.K. natgas prices have increased 17.6% in September, outperforming the EU benchmark
As we head into another step of BoE's tightening campaign, we think the shift in pricing expectations would not affect the pound, unless the market is disappointed, however, bad news is priced in. In terms of REER rates, the GBP remains flat relative to its 5-yr ranking, in other words, it's not extremely devalued, yet.
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