UK gilts witness heavy selling on Fed’s hawkish outlook; BoE’s policy decision in focus

The UK gilts witnessed a heavy selling pressure on Thursday as the U.S. Federal Reserve presented a hawkish outlook in its last monetary policy meeting for 2016 late Wednesday. Markets now await the Bank of England’s (BoE) monetary policy decision later in the day.

The yield on the benchmark 10-year gilts, which moves inversely to its price, rose 10-1/2 basis points to 1.49 percent, the super-long 40-year bond yield bounced 8 basis points to 1.93 percent and the yield on short-term 2-year climbed 4-1/2 basis points to 0.15 percent by 09:40 GMT.

The Federal Open Market Committee increased the fed funds rate to a 0.50-0.75 percent range, as widely expected. The statement noted that information received since the November meeting indicates that the labour market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year.

Also, the new projections showed that the central bankers expect three quarter-point rate increases in 2017, up from the two seen in the previous forecasts in September, based on median estimates.

The final formal Bank of England MPC meeting for the year ends with a decision announcement on Thursday by 12:00 GMT and we expect this to declare a no-policy-change outcome. This would leave the Bank Rate at its record low 0.25 percent, the current programme of gilt purchases at 435 billion pounds and the programme of non-financial corporate bond buying at no more than 10 billion.

On Tuesday, UK’s annual consumer inflation accelerated to 1.2 percent y/y in November, from previous 0.9 percent y/y, registering its fastest pace of growth since October 2014 and on the back of a 0.2 percent m/m increase.

The core rate is running at an even quicker pace, up at 1.4 percent y/y from 1.2 percent in November. As the headline rate marks a faster rate of increase than the 1.1 percent y/y expected by the market, this should be construed as a Gilt-negative development.

The Bank of England (BoE) in its latest inflation survey raised 1-year inflation expectations to 2.8 percent, from estimate of 2.2 percent in August, 2-year forecast to 2.5 percent, from earlier forecast of 2.2 percent, 5-year forecast to 3.1 percent vs prior 3.0 percent. Additionally, the central bank increased 12-months rate rise expectations to 41 percent, from previous expectations of 21 percent.

Meanwhile, the FTSE 100 traded 0.09 percent lower to 6,943 by 09:40 GMT. While at 09:00 GMT, the FxWirePro's Hourly GBP Strength Index stood neutral at +11.29 (higher than +75 represents purely bullish trend).