GBP Money Markets: Bank of England is supporting liquidity
At a Glance
The desk believes that the Bank of England's liquidity support will stabilize money markets, ultimately leading to lower terminal rate expectations. The commentary notes that while bank reserves are stable, allowing for a healthy liquidity environment, market pricing is still too aggressive on future rate hikes, with only about 20 basis points anticipated this year. Per the full note , considering the recent shift in market sentiment due to declining oil prices, the desk argues for positioning further out the curve as inflationary pressures are expected to ease by 2027.
Key Takeaways
- 01Bank of England's liquidity measures are stabilizing money markets.
- 02Market pricing of future rate hikes appears overly aggressive, with expectation of only 20bps in hikes this year.
- 03Shifts in oil prices are influencing a more dovish sentiment, impacting future monetary policy.
- 04The desk advocates for longer-term positioning given expected easing in inflation pressures by 2027.
Full Analysis
What the desk is arguing
The desk posits that strong liquidity support from the Bank of England will enhance market stability and bring down rate expectations over the medium term. Despite a volatile environment, stable reserves, bolstered by the BoE's liquidity facilities, are currently aiding market conditions. This is evidenced by the Short-Term Repo uptake, which saw an increase to £134 billion, nearly double the amount from a year ago.
Moreover, the desk highlights the market's mispricing of the terminal rate, suggesting that further tightening beyond current levels is unlikely. With the inflation outlook softening and market only pricing in modest hikes, the desk recommends focusing on longer-term positions as the Bank of England may cut rates down to 3.25% by 2027.
Where it sits in our coverage
Our consensus target for GBP/USD stands at 1.3500, with a range from 1.2400 to 1.3800. This aligns closely with targets from several firms, including: - citi: Dec26 target at 1.2400 - commerzbank: Dec26 target at 1.4020 - scotiabank: Dec26 target at 1.3800
The desk's positioning aligns with the upper range of market views, suggesting an optimistic outlook compared to peers like nomura and goldman, who forecast lower targets by Dec26.
How other firms see it
Several firms share an optimistic stance on GBP, including hsbc and morganstanley, both expecting targets around 1.35 by Mar26. Conversely, firms like citi and nomura have issued more conservative assessments, indicating skepticism about reaching the higher targets suggested by the desk's outlook.
This environment necessitates close monitoring of related currency pairs, especially EUR/USD, since the trajectory there may also reflect shifts in BoE policy, influencing GBP's performance.
Market Implications
Traders should watch the recent uptick in GBP/USD around 1.3500, as market sentiment shifts could pivot directionally based on BoE communications. With no imminent high-impact events, next moves in this currency pair may hinge on inflation data that could impact rate expectations.
GBP/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Goldman Sachs | Bullish | 1.3600 |
UOB | Bullish | 1.3700 |
Bank of America | Bullish | 1.3700 |
From the original
Articles GBP Money Markets: Bank of England is supporting liquidity 14:20 Rates United Kingdom Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Liquidity conditions look very healthy, and stable bank reserves are helping money markets. We think the ter
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