GBP Money Markets: Bank of England is supporting liquidity
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.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
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.
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.
Risks to this view
A sudden resurgence in inflation could reverse the current dovish tone, compelling the Bank of England to reconsider its rates. Additionally, any geopolitical shocks leading to higher oil prices could similarly re-ignite inflation fears, destabilizing the current market conditions.
GBP/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Goldman Sachs | Bullish | 1.3600 |
UOB | Bullish | 1.3700 |
Bank of America | Bullish | 1.3700 |
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 terminal rate priced in by markets is too high and prefer positioning further out the curve. Tweaks to the Discount Window Facility increase the system's resilience against liquidity shocks Michiel Tukker Stable reserves – thanks to the Bank of England's liquidity facilities – are supporting money market conditions High Bank of England terminal rate favours terming out Money market curves are still positioned for a Bank of England hike later this year, but the sharp decline in oil prices has turned sentiment more dovish.
Only around 20bp of hikes are priced in for this year, and this could still go lower once the risks of second-round inflation effects are better understood. Whilst we still acknowledge the chance of another hike, we disagree with markets’ perceived terminal rate of 4%. We expect price pressures to ease in 2027, allowing the BoE to cut the policy rate to 3.25%.
As such, we see more value further out the curve. We think markets are pricing in a too high terminal Bank Rate Liquidity conditions benefit from stable reserves Despite the increased volatility in rates, liquidity conditions have remained very healthy. Overall bank reserves have actually increased thanks to a strong pickup in the Bank of England’s liquidity facilities.
The uptake of the Short-Term Repo (STR) increased to £134bn, almost double that in July last year. Pickup in BoE liquidity facilities helped reserves stabilise for now Source: ING, Bank of England, Macrobond "> Source: ING, Bank of England, Macrobond We’ve previously signalled that the upward pressure on gilt yields might trigger a review of the Bank of England’s pace of quantitative tightening in September. Right now, the BoE targets £70bn of unwinding annually, which, all else equal, would reduce reserves by a similar amount.
If this number gets reduced to say £50bn, the withdrawal of bank reserves from the system would proceed at a slower pace. In effect, this would further support liquidity conditions going forward. Overnight deposit rates are comfortable at current levels SONIA is now trading at just 2bp below the Bank Rate and could remain there for longer.
The Bank Rate provides a soft ceiling which limits further upside. Around 25% of banks are now offering the Bank Rate for attracting deposits, but we also see around 10% of banks offering around 5bp below the Bank Rate. As reserves stay around current levels, we shouldn’t see much movement in the pricing of SONIA.
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Cross-firm research
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Cable trades 2.33% below the 20-firm median Dec-26 target of 1.355, with a 0.26-point spread separating UBS at 1.50 from Citi at 1.24.
GBP/USD: Consensus Targets 1.355 but Spot Sits 2.3% Below
Cable trades at 1.3234 against a 20-firm median Dec-26 target of 1.355, a 2.33% gap that reflects divergent BoE-vs-Fed rate path assumptions.
GBP/USD Consensus Check: 1.355 Target, Spot at 1.3234 — Week of Oct 10, 2026
Cable trades 2.33% below the 20-firm median Dec-26 target of 1.355, with a 0.26-figure dispersion that reflects a live debate over BoE-vs-Fed cut sequencing.