Menu

Search

  |   Commentary

Menu

  |   Commentary

Search

GBP weakened both against the EUR and USD following the policy announcement

The market was clearly positioned for a more hawkish BoE today and GBP swap rates are 3-4bp lower across the curve. For now, the BoE is expected to hike in Q4 15 (most likely in November) but it depends on the development of inflation. Hence, a significant rise in UK interest rates in the coming months and the GBP yield curve is expected to flatten, with rates rising most in the 0-5Y segments. The 2Y GBP swap rate is targeted at 1.3% in 3M and 1.6% in 6M.

In the FX market, GBP weakened 0.7% versus EUR and 0.85% versus USD. According to the short term financial models, pricing action in the FX market seems fair given the decline in UK yields. However, EUR/GBP still trades 1.3 standard deviation above the model's short term estimate of 0.69. Fundamentally, EUR/GBP is expected to trade lower in the coming months driven by relative interest rates. The EUR/GBP is expected at 0.69 in 3M to 6M but stress that the risks remain that the cross temporarily undershoots the targets. While speculative investors gradually have bought GBP since the beginning of the year, non-commercial positioning is fairly neutral, according to the latest IMM positioning data. Hence, there should room for further GBP longs to be added. 

Relative rates are also expected to be an important driver for GBP/USD in H2. Based on the interest rate forecasts, where the Fed is expected to hike in September, the repricing of 2Y US interest rates is expected to much larger relative to the 2Y segment in UK. In fact the rate spread is expected to change sign in the coming months going from 20bp today to -10bp in 6M. Even if the Fed hikes later this year, the 2Y swap spread should still narrow substantially. The GBP/USD is targeted at 1.51 in 6M.

  • Market Data
Close

Welcome to EconoTimes

Sign up for daily updates for the most important
stories unfolding in the global economy.