GBP: Awaiting clarity on BoE emergency purchases

The roller coaster ride in GBP looks far from over. Yesterday, Bank of England
Governor Andrew Bailey surprised by announcing that emergency gilt purchases
will be discontinued – as scheduled – at the end of this week, adding that pensions
funds had only three days to close their liquidity positions. The remarks triggered a
drop in the pound below the 1.1000 threshold and back-end gilts came under new
pressure.
UK markets are now assessing the credibility of a report by the Financial Times that
the BoE communicated privately to banks that the emergency buying programme
may actually be extended beyond this week. GBP rose on the news and is currently
trading at the 1.1000 mark, but that appears to be a sort of “limbo” level where
markets are awaiting more clarity on this theme. Our rates team notes that Bailey’s speech and the FT report are indeed contradictory but not entirely inconsistent, as
the BoE is likely fearing that the pledge of longer-term intervention would
discourage pension funds to de-lever.
Today, speeches by MPC members Jonathan Haskel (0900 BST), Huw Pill (1235 BST)
and Catherine Mann (1800 BST) will be very closely watched. It does appear that the
extension of the emergency gilt buying is currently holding the key to averting
another sharp sell-off in the gilt market and the pound. We should expect more
volatility in the pound for today, and we continue to see the direction of travel as
mostly negative, with cable set to drop to the 1.00-1.05 area by the end of the year.
On the economic side, things aren’t offering much support either, as this morning’s
data showed a surprise economic contraction by 0.3% month-on-month in August,
paired with a large slump (-5.2% YoY) in industrial production.

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