Sterling sustained outperformance

GBP performed very strongly again over the last month, gaining against all other G10 currencies and with EUR/GBP briefly dipping below 0.70 for a new seven year low. GBP'soutperformance is largely a conventional interest rate expectations story. 2yr spreads widened in the UK's favour against every major market, with the exception of the European periphery. 

But despite GBP's outperformance since the UK general election, there is plenty more to go for going forward. The OIS market does not have a full hike priced until May/June 2016 far later than expectations of a November hike.

The main near-term risk to our bullish GBP view is from fiscal policy. The July 8 Budget will no doubt be presented as a significant, front-end loaded, tightening of fiscal policy and, other things being equal, this would put downwards pressure on forward rates. 

However, with so little discounted as a starting point, this risk is not great and also the MPC has in past not shown great sensitivity to shifts in fiscal policy when setting rates, says RBC capital markets.