GBP runner-up of the Fed?

19 October,, London – The sell-off in GBP and rally in UK rates has forced the market to price back the first rate hike by the BoE to early 2017, much further than Goldman Sachs’ expectation for Q2 2016.

UK rates have followed the lead of US rates shifts in response to both dovish FOMC and softness in US fundamental data, GS points. As GBP appears ‘policy relevant’ with BoE’s aiming to return inflation to target “within two years,” developments outside the GBP, particularly US data and the Fed, are interpreted by the market as having implications for the UK curve.

Read also: GBPUSD Profit hunt

When the Fed sounds dovish and the USD comes under pressure, the market responds with a lower GBP curve. Alternatively, when anticipation for higher pace, the Fed hiking cycle leads to a relief in GBPUSD. The result is a wider room to price in BoE hikes. Although the MPC may not welcome such increasing sensitivity to the US, GS argues, for the time being markets are making the connection.

GDP – runnerup of the Fed?

GBP runner-up of the Fed?

Owing to the exchange rate, “the BoE finds itself in a three-legged race tied to the Fed, a much bigger partner. While this continues to make GBPUSD a tricky call (GS forecasts relative stability around 1.50 level), we expect that upcoming ECB easing will weigh on EURGBP,” the major bank argues.

May the US data evolve to the upside, Goldman expects the Fed to hike in December. “This is likely to be another catalyst for a repricing higher of the UK curve, and for EURGBP to fall. We forecast 0.65 in 12 months,” Goldman Sachs added.

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