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."
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