Megan Trainor's song All about that Bass, could be the theme song for sterling traders. Shifting views on the outlook for the Bank of England's base rate does a good job explain the vagaries of sterling in recent months.
This Great Graphic, from Bloomberg, how well sterling (white line) has tracked the implied yield of the March 2015 short-sterling futures contract. Interest rate expectations peaked in mid-June, and sterling peaked a month later. The two have been moving in tandem since, even though the jitters ahead of the Scottish referendum.
Expectations for the first BOE rate hike are being pushed out, despite two dissents at the last couple of MPC meetings in favor of an immediate hike. The UK economy appears to have lost some momentum, price pressures remain subdued, and wage growth remains miserly. Some opinion polls suggest that Labour could win next May's general election. Some think that this may add pressure on the BOE to hold off hiking rates until after the election.
We are a bit skeptical of such partisan politicization of the monetary policy. Moreover, even though UK households are more sensitive to an increase in base rate (as most mortgages have adjustable rates), being the first G7 country to begin normalizing monetary policy is a sign of the recovery of the UK economy.
Great Graphic: Sterling--Its All about the Base, No Trouble
Reviewed by Marc Chandler
on
October 02, 2014
Rating:
Reviewed by Marc Chandler
on
October 02, 2014
Rating:
