GBP: Governor Bailey indicated pace of QT remains under consideration – MUFG

The Pound Sterling (GBP) has been on been one of worst performing G10 currencies so far this week alongside the yen. GBP has been negatively impacted by the sharp sell-off in log-term Gilt yields with the 30-year yield breaking above resistance at 5.60% and rising to a fresh year to date high of 5.75%. It is the highest level since the 1H 1998 which adds to building concerns over the UK government’s finances. Those fiscal concerns have become more important again recently in driving pound performance, MUFG's FX analyst Lee Hardman reports.

UK rate market continues to price in less BoE rate cuts going forward

"It has been notable that the pound has fully reversed gains recorded in August after the BoE provided a hawkish policy update which cast more doubt on whether they would deliver another quarterly rate cut in November. EUR/GBP fell to a low of 0.8597 on 14th august but has risen back up to the 0.8700-level in recent days. At the same time, the UK rate market continues to price in less BoE rate cuts going forward. The yield on the 2-year gilt yield is still around 14bps higher than prior to the BoE’s August MPC meeting." 

"BoE Governor Bailey’s comments in front of Parliament’s Treasury committee shed more light on recent developments. He effectively endorsed the recent hawkish repricing of the UK rate market by stating that his 'message has landed', and that there is 'now considerably more doubt about exactly when and how quickly we can make those further steps'. The BoE has become more concerned again over the risk of higher inflation proving persist. He added 'the risk on inflation has gone up' but he remains more concerned than colleagues over the state of the labour market."

"The BoE’s Market Participants Survey from August revealed that the median forecast is for QT to slow to around GBP75/year down from the current pace of GBP100 billion. Plans for a faster slowdown in QT could offer some support for the gilt market and help ease downside risks for the pound in the near-term. Governor Bailey also added that the Debt Management Office (DMO) is already cutting back issuance at the long-end to a record low proportion of sales to reflect less structural demand for long-dated, long-maturity bonds."