The swift repricing of short-dated UK interest rate futures has sent bond yields plunging but barely moved sterling, which is still holding out hopes of a post-election, post-Brexit inward investment bounce that will lift the pound in time.
On Jan. 9, money markets saw just a 20% chance of an interest rate cut this month. But by Jan. 17, dismal UK growth and inflation readings from late 2019 and a series of speeches from Bank of England chief Mark Carney and at least three of his policy-making colleagues pushed those easing expectations to 70%.
Gilt markets responded with a roughly 25 basis point fall in yields. But sterling, which would typically weaken on the prospect of lower rates, slipped by less than 1%.
“We do not often see such a dichotomy between gilts and sterling,” said Neil Jones, head of hedge fund sales at Mizuho. “The explanation would lie in the gilt market focusing heavily upon interest rate expectations while the pound … is also looking at other factors such as longer-term investor inflows.”
Bullish sterling bets rose to 21-month highs in the week to Jan. 14, according to the U.S. Commodity Futures Trading Commission, and speculators are now substantially net ‘long’ of pounds.
Derivatives markets also show little sign of worry — for the first time since October, there’s an implied volatility premium to buy one-month sterling ‘calls’ over puts — options conferring the right to buy and sell, respectively.
Sterling remains sensitive to developments following Brexit on Jan. 31, however, while Carney’s replacement as central bank governor by Andrew Bailey next month is another source of potential uncertainty.
The pound relapsed below $1.30 on Monday after comments by finance minister Sajid Javid revived fears that Britain and the European Union will not have agreed a trade deal before the post-Brexit transition period expires at year-end. It has recovered since.
Source: Hellenic Shipping News