GBP: Reaction to gilts selloff looks a bit overblown – ING
|The Pound Sterling (GBP) had a rough Tuesday as back-end gilt yields rose, with the 30-year hitting its highest level since 1998, ING's FX analyst Francesco Pesole notes.
BoE to cut rates by year-end
"It’s important to note, though, that the long-dated bond selloff was happening across Europe yesterday, and gilts didn’t underperform their peers. Yesterday’s 0.7% rise in EUR/GBP highlights just how sensitive the pound is to yield increases, but we take a conservative view and don’t expect the pound to fall much further on gilt moves alone."
"While the rise in back-end yields is getting a lot of attention amid scrutiny of the UK fiscal situation, much of the increase is tied to higher inflation and hawkish repricing of Bank of England rate expectations rather than fiscal worries. Demand for extra-long-dated debt (like 30-year gilts) has been weak across developed markets, but a 10-year gilt auction attracted very strong demand, raising a record £14bn. That doesn’t support the idea that fiscal concerns are outweighing inflation and BoE repricing in driving yields higher."
"We’re not optimistic on the pound as we still expect the BoE to cut rates by year-end, but the moves in back-end gilts don’t seem dysfunctional and don’t justify a persistent risk premium on sterling, especially given the UK government’s likely fiscal consolidation plans. For now, we think EUR/GBP belongs below 0.870."
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.