Sterling gains as UK fiscal risks build

Matthew Ryan, CFA Ebury

Sterling posted solid gains on the dollar on Tuesday, while retreating modestly off three-month highs against the euro. UK government bonds have traded in a relatively calm fashion in the past couple of weeks compared to continental Europe, or the US for that matter.

In some ways this is not overly surprising, given that the UK's fiscal situation, while far from pristine, is not as dire as France's, but we also think the risk is underpriced ahead of the budget later this month.

Our view that the risks of more damaging tax rises and higher borrowing are real appears to be gaining a bit of extra traction among market commentators, but that is not yet showing up in gilt markets.

Focus during the remainder of the week will be on a couple of speeches from Bank of England members, including Bailey, Greene and Lombardelli on Thursday. Hawk Catherine Man, who has voted to hike in each of the past two MPC meetings, said yesterday that inflation had become embedded in the UK - a view that we don’t think her fellow members are as of yet ready to share.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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