FxWirePro: UK rates markets append higher probabilities of August BoE hike amid unsettled Brexit fog – OIS swap spreads for low-beta

On the course of Brexit discussions, although the Chequers proposal is clearly unacceptable to the EU, the limited negative commentary is expected from Barnier and the EU for the time being given the domestic political pressure on May over the past couple of weeks. The negotiating discussions would likely prolong over August with the European Council meeting scheduled for 18 October the next staging post, although there could be an additional informal European Council in September.

The noise around the potential of a ‘no-deal’ may increase over the coming months on the lack of progress on the Irish issue in the Withdrawal Agreement, particularly as the UK government will publish a series of advisory technical notes for business and individuals on the impact of ‘no deal'.

EC has recently published a set of documents outlining very clearly the impact of the UK leaving the EU either with or without the Withdrawal Agreement in place. Rumours around a ‘no deal' outcome have increased but our baseline view remains that the UK will eventually achieve a managed transition in March 2019.

It has been another week to keep markets on their toes. Of particular interest has been the slide in sterling to a 10-month low against the US dollar (hitting 1.2958). It also slipped against the euro, albeit to a lesser extent. The depreciation seemed to be a reaction to both weaker than expected UK economic data and further uncertainty around Brexit. A series of data releases provided reasons for doubt whether the Bank of England will raise interest rates on the 2nd August.

Nevertheless, interest rate futures markets still attach close to 80% probability to an August hike. We continue to think that BoE policymakers will focus on the bigger picture rather than the most recent data releases and that an increase is the most likely outcome. Despite softer inflation data, we expect the BoE to deliver an August hike.

Keep Aug18/Nov18 MPC OIS steepeners. Keep reds/greens SONIA curve steepeners as low-beta positive carry bearish view

Swap spreads: Take profit on 2Y LIBOR narrowers. Keep 10Y OIS narrowers as a low-beta bearish proxy. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly EUR spot index is at shy above -42 levels (which is bearish), while hourly GBP spot index is edging higher at -2 levels (neutral) and USD is flashing at -117 (highly bearish) while articulating (at 12:13 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex