UK rate expectations are likely driving much of Sterling’s spot and forward pricing. Near-term UK rates are expressing at least a high degree of correlation if not causation with GBP as the market questions what next week’s Bank of England (BoE) decision and the rest of the year will bring to UK interest rates. As we wrote yesterday, weak consumer data tilted cable through a significant support level leading to defensive selling pressure in the currency pair and other Sterling crosses. The bad news for GBP (at the very least GBPUSD) is that there is very little perceived technical resistance below current levels that might propel a reversal in the currency.
The BoE also presents a huge risk to GBP once again next week. Alongside the fall in GBP, we also saw market expectations for the May 5th monetary policy decision change. Last week markets were pricing all of a 25-basis point hike plus the majority of a second hike, suggesting that the market was expecting a ‘double hike’ from the bank. Today market pricing shows just 29-basis points worth of hike priced in to overnight rates showing how growth expectations, driven by the consumer data release, have dented the expected reward for holding GBP.
The BoE has remained cautious surrounding UK rate expectations further down the line likely due to the uncertainty surrounding UK growth as the cost of living continues to rise. The expectations for the rest of the year have changed less in the face of recent fast-moving data. The market still expects and is pricing six full 25-basis point hikes this year with a seventh still mostly priced in by year-end. As we have discussed before, this is a double edged sword for GBP: fulfil market expectations and you risk choking growth; deny them at your peril of an even greater sell-off in Sterling.
The Bank of England is currently in a black out period ahead of the decision next week so there will be no further comments on the monetary outlook from its Committee. There are also no major UK data releases ahead of the decision. This weak risk sentiment could prompt a further pricing out of UK rate hiking expectations, undermining support for GBP even further.
Discussion and Analysis by Charles Porter