Reeves triggers first gilt shake-up – ING

Unlike her ECB colleagues, Bank of England hawk Catherine Mann stuck to her usual tone yesterday, staying relatively pessimistic on disinflation and pointing to risks the BoE may cut too much too early. Three speeches by Governor Andrew Bailey this week have instead yielded little to no headlines. There is one last chance for Bailey to talk monetary policy at a Saturday event, so beware of some early Monday reaction in the Pound Sterling (GBP), ING’s FX analyst Francesco Pesole notes.

1.28 can be reached in the near term

“Yesterday’s PMIs in the UK were softer than expected, and while still looking decent compared to the eurozone, they are probably adding a bit of extra pressure to the BoE. Still, the gilt market and the GBP are now laser-focused on next Wednesday’s UK budget announcement. Yesterday, Chancellor Rachel Reeves confirmed that she will change the fiscal rule to increase investments, which will pave the way to a potential increase in borrowing in the order of tens of billions.”

“We discuss all this and the market sensitivity to the theme in our detailed UK budget preview. Gilts underperformed other developed market bonds after the fiscal rule announcement, and there seems to be a consensus view that UK yields have extra room to rise on budget news. From an FX market perspective, what matters is whether any gilt underperformance turns into uncontrolled volatility.”

“Given the GBP is pricing in no risk premium, the downside risks for the currency would be very large. For now, we reiterate a bearish bias on GBP/USD, which can suffer from defensive positioning ahead of the combined UK budget and US election risks. Our view remains that 1.28 can be reached in the near term.”