GBP Money Markets: High premium for terming out
At a Glance
The desk posits that current market expectations for Bank of England policy tightening are overly aggressive, with the potential for value further out on the sterling money market curve. Per the full note, the expectation is for more than four rate hikes amid high oil prices, yet this appears excessive given recent economic indicators. Consensus targets for GBP/USD show a median around 1.36, with varying forecasts indicating divergent views on the currency's trajectory. With no major events on the calendar, focus shifts towards market volatility driven by external geopolitical developments.
Key Takeaways
- 01Markets are pricing in excessive rate hikes by the BoE amid high oil prices.
- 02Expectations suggest SONIA could rise to around 4.75%, which may be too hawkish.
- 03With no high-impact calendar events, external volatility remains a risk for GBP.
- 04The desk sees value in longer-term exposures on the GBP money market curve.
Full Analysis
What the desk is arguing
The desk argues that the market has baked in excessive hawkishness regarding the Bank of England's interest rate path, suggesting that there is value in longer-term money market exposure. Per the full note, the market is discounting over four Bank of England hikes, which seems disproportionate especially given that the central bank is communicating a more dovish stance.
With Brent crude prices hovering around $100, the note cites a correlation where a $10 hike in oil leads to a 15 basis point rise in the 2-year gilt yields. Notably, they assert that the current policy rate at 3.75% is already curtailing economic activity, which limits the risk of further significant tightening.
This view implicitly rejects the notion that the labour market will rebound or that inflation will demand aggressive rate hikes in the near term, especially as inflation is projected to converge to target by 2027.
Where it sits in our coverage
Our consensus target for GBP/USD stands at 1.36 with a range from a low of 1.24 to a high of 1.38 by December 2026. Specific forecasts include socgen with a target of 1.33, hsbc at 1.35, and barclays proposing 1.41.
This aligns relatively closely with the desk’s view, which sits at the upper end of this spread considering the median target. Market consensus appears to be cautiously optimistic, contrasting with the desk’s more bearish outlook on the necessity for future rate hikes.
How other firms see it
Group aligned firms like morganstanley and hsbc maintain similar views towards the currency pair, expecting slight appreciation towards year-end. However, firms such as citi project a lower trajectory, underscoring contrasting views on the pound's resilience against current market pressures.
The trajectory of GBP/USD may also intersect with movements in related pairs such as EUR/USD or shifts in the BoE’s monetary policy stance, warranting close attention to broader economic indicators.
Market Implications
Traders should monitor GBP/USD's movements closely around the consensus target of 1.36, particularly given the prevailing geopolitical risk tied to oil prices. A shift in expectations for future rate hikes could create volatility.
GBP/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.3700 |
Bank of America | Bullish | 1.3700 |
Rabobank | Bearish | 1.3300 |
From the original
Articles GBP Money Markets: High premium for terming out Published 09:02 Rates Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Markets are pricing in more than four Bank of England hikes as oil trades around $100, but we think expectations have turned
Related speeches
4 itemsRates Spark: Sterling’s hawkish pricing still looks overdone
The desk believes that the current market pricing for UK interest rates is overly hawkish compared to the guidance from the Bank of England (BoE) and the underlying macroeconomic fundamentals. Per the full note from ing-think, recent commentary from BoE Governor Andrew Bailey suggests skepticism towards the expectation of multiple rate hikes within the next year, as market participants appear to be factoring in an implicit risk premium rather than reflecting genuine policy shifts. The sensitivity of UK rates to fluctuations in oil prices further complicates near-term trading perspectives, with a noted increase in Brent crude prices contributing approximately 15 basis points to 2Y rates, exceeding increases in EUR and USD counterparts.
Why the Bank of England might not be as hawkish as you think
The desk believes that the Bank of England (BoE) is unlikely to adopt a hawkish stance in the near term, as indicated by the source commentary discussing the upcoming September 17 meeting. Per the full note, the expected 6-3 vote will likely see rates held steady at 3.75%, with inflation pressures remaining contained primarily to energy costs, particularly rising natural gas prices. With the consensus reflecting targets around 1.36 for GBP/USD, the market seems positioned for a cautious approach, and traders should watch for possible shifts in the BoE's communication regarding future rate hikes as energy prices evolve.