GBP: don’t despair (just yet)

The BoE intervened to restore stability in the gilt market while delaying its QT by a
month. At the time of the writing, the policy action has helped contain the selloff in
the fixed income markets and the GBP. We think that the BoE announcement
should have two opposing effects on the GBP from here. The first effect is negative
given that the BoE’s actions strengthen the market perception that the government
fiscal stimulus would undermine the credibility of the MPC’s efforts to bring inflation
under control. As a result, the UK real rates and yields can move lower still and
add to the headwinds for the GBP. The second effect could be more positive,
however, and relates to the ability of the BoE to restore calm to the gilt market in
coming weeks. Indeed, to the extent that the GBP selloff was fuelled by soaring
sovereign credit risk, the BoE’s decisive actions could help ease some of the
market concerns and thus help the pound consolidate.We further note that the gilt
market intervention helped support both the UK and international fixed income
markets encouraging some clients to speculate that the seemingly desperate MCP
actions could become the template for other central banks dealing with bond
market turmoil. If anything, we think that this is a greater risk for the ECB than the
Fed and that this could be yet another reason to worry about the EUR/USD outlook
in coming months. On the day, focus on speeches by MPC’s Huw Pill, Silvana
Tenreyro and David Ramsden, with the investors looking for any indications that
the BoE maybe willing to follow through its gilt market intervention with a rate hike
to prop up the GBP.

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