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Traders Caution Strong Against UK Rates Cut Bets Due to Inflation

Traders Caution Strong Against UK Rates Cut Bets Due to Inflation

Trades predicated on the anticipation of the Bank of England’s inclination to reduce UK rates are considered unsubstantiated by optimistic pound traders. They assert that an impending pivotal inflation report could prompt a surge in the currency. Following Chief Economist Huw Pill’s remarks, which fueled expectations of interest-rate cuts in the coming year. The sterling recently reached its lowest point against the euro since May. Strategists from Credit Agricole SA and Bank of America Corp. Argue that these speculative positions overstretched, creating conditions for a pound rally as they are unwound.

UK Rates Impact: Service Prices and Currency Strategy Insights

Despite the expected significant drop in Wednesday’s headline inflation figure, mainly due to energy prices. The trajectory of UK Rates and bond yields and the pound hinges on the resilience of a closely monitored gauge of service prices. If this indicator remains elevated or if the overall economic deceleration proves less pronounced than anticipated, UK bond yields are likely to adjust upward. The that propelling the pound.

Valentin Marinov, Head of G-10 Currency Strategy at Credit Agricole, contends that numerous negative factors already factored into the sterling’s price. He recommends seizing the opportunity to acquire the pound at its current depreciated levels against the euro and US dollar. Emphasizing that rates markets are overreacting to what he perceives as a relatively neutral and data-dependent forward guidance by the monetary policy committee.

Also Read: US Treasury Yields Stand Strong ahead of inflation Data

Bank of England’s Policy Shift: Anticipation of Easing Measures and Market Response

Following the Bank of England’s historic tightening measures, market sentiment increasingly leans toward the notion that the central bank’s key rate has reached its zenith. Traders anticipate a shift toward easing starting in the middle of the next year. With market pricing implying nearly three quarter-point rate cuts by the end of 2024.

While Governor Andrew Bailey suggests it is premature to discuss rate cuts. He refrains from countering market pricing as assertively as before. Huw Pill’s comments hinting at potential rate cuts by mid-2024 were met with a varied response. With some interpreting them as validation of the market’s projected rate trajectory. While others highlight potential caveats, such as global events influencing the timing.

Kamal Sharma, a strategist at BofA, asserts that the market pricing for UK rate cuts into the next year appears inconsistent with the Bank of England’s rhetoric. Dismissing these projected rate cuts could lend support to the pound.

Analysts’ Perspectives on UK Economic Challenges and Market Strategies

Acknowledging substantial economic headwinds for the UK, Orla Garvey, a fixed-income portfolio manager at Federated Hermes. Sees potential for further gains in shorter-maturity gilts, albeit at a decelerating pace. UBS Group AG economists predict a slowdown in October’s inflation to 4.5%, recommending selling the pound against the Swedish krona. Yvan Berthoux, a strategist at UBS, notes a softening fundamental outlook in the UK. Prompting investors to question the sustainability of the Bank of England’s hawkish stance.

Hank Calenti, Senior Fixed Income Strategist at SMBC Nikko Capital Markets, suggests that even in the event of low inflation. The market might misinterpret it. While the Bank of England attributes any inflation drop to falling energy prices, Calenti anticipates the market’s myopic response to solely focus on the decline. Expressing the possibility of at least one more rate hike, if not two.


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