Governor Carney’s speech last week led to a large repricing of front-end UK rates last week, with expectations of the first hike brought forward to December 2014 (from March 2015 prior) and correspondingly, GBP/USD posted new highs, and EUR/GBP made new cyclical lows.
Now that the dust has settled, Deutsche Bank thinks that further near term gains from monetary policy repricing should be limited. DB outlines 6 reasons behind this view:
First, the pound is already leading moves in real yields (chart 1), which partly explains why the follow through in price action has been somewhat disappointing
Second, it is hard to see timing getting any more aggressive with two hikes now fully priced before the general election.
Third, the shift in the front end was not reflected down the rest of the curve, consistent with a lower for longer outlook.
Fourth, Carney may have achieved his goal of introducing more volatility in rates last Thursday, but is unlikely to want to compound the reaction.
Fifth, despite strong employment, wage growth shows no sign of materializing.
Sixth, changes to the MPC should favor conservativism given the relative lack of experience of the newcomers.
All in all, how to play the pound now?
“Taking into account positioning remains stretched and political risks un-priced, we retain our bearish GBP/USD call, targeting 1.60, but with a stop at 1.73 should the cycle surprise again to the upside,” DB advises.
