Global Rates: Scandi and BoE Central Bank wrap up, UK politics (again)
The desk posits that the recent central bank meetings from the Riskbank, Norges Bank, and Bank of England (BoE) highlight a shifting landscape in global rates amid evolving political dynamics in the UK. Per the full note from J.P. Morgan, commentary from Francis Diamond and Khagendra Gupta underscores the importance of these decisions against the backdrop of UK politics, particularly following the Makerfield by-election. The BoE's stance, potentially tightening policy amid inflation concerns, juxtaposes with dovish tones in the Nordics, suggesting divergent paths for currency valuations. With volatility expected ahead, trader positioning will need to adapt swiftly to such developments.
What the desk is arguing
The desk argues that central banks are navigating a complex interplay of domestic political issues and economic pressures, underscoring different trajectories for monetary policy. The podcast discussion notes that the BoE's recent meetings could lead to shifts in GBP currency dynamics amidst ongoing UK political challenges.
Specifically, they predict that a tightening from the BoE could elevate the GBP, while the more cautious approaches of the Riskbank and Norges Bank might limit SEK and NOK gains, respectively. As inflation exceeds the targets both in the UK and globally, expect heightened market sensitivity to central bank signals.
Where it sits in our coverage
With our covered targets, the consensus for GBP/USD sits at 1.075, with a range of 1.04 to 1.12. Key firms contributing to this view include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) The desk's perspective aligns with jpmorgan, which reflects a bullish stance near the upper end of the consensus range. Conversely, bofa offers a more cautious outlook, suggesting a divergence in trading strategy.
How other firms see it
Firms aligned with a bullish GBP outlook include jpmorgan, advocating for potential gains based on a tightening BoE. On the contrary, bofa leans toward a more bearish stance, anticipating limitations in GBP appreciation.
Related watch-points include the BoE's rate trajectory and its impact on GBP/USD and EUR/GBP dynamics.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01BoE's monetary policy decisions could significantly affect GBP exchange rates.
- 02Norges Bank and Riskbank are taking a more cautious stance, contrasting with the BoE's tightening.
- 03UK political developments remain a central theme influencing market sentiment going forward.
Market implications
Keep an eye on the GBP/USD level at 1.075, as any movement away from this target may indicate shifting trader sentiment based on upcoming geopolitical developments. Additionally, watch for any comments from the BoE that could further clarify rate-hike expectations.
Risks to this view
Risks to this outlook include any unexpected political stability in the UK that could lead to a reversal of the BoE's tightening stance. Additionally, if inflation readings begin to soften unexpectedly, this could prompt a dovish shift from the BoE, undermining the bullish GBP sentiment.
Hi, and welcome to At Any Rate, JPMorgan's global research podcast, where we take a look at some of the drives behind the biggest trends and themes across fixed income, currencies and commodity markets. I'm Francis Diamond, head of European rates strategy at JPMorgan, and today I'm joined by my colleague, Kigendre Gupta, to discuss the Riksbank, Norwich Bank and BOE meetings this week, and also talk, again, about the latest developments in UK politics following the Makefield by-election. So, Kigendre, let's start with the Riksbank, who left the policy rate unchanged at 1.75% this week, with some tweaks to its forecast.
How do you read the Riksbank messaging here on the path of policy rates and what's priced into the market? Thanks, Francis. Yeah, the Riksbank kept rates unchanged and made, as you mentioned, minor tweaks to its forecast.
They now have an explicit hiking bias in the sense that their forecast now shows around 50% probability of a 25 basis point hike by December of this year and a full hike by end of next year. So, these are around, at least in the front end, around five basis point higher relative to the March forecast. In my mind, these divisions were dovish compared to the market expectations, which was pricing almost a full hike by September, October, going into the meeting, and then this pricing has now been pushed still towards late Q4, 26, so well ahead of Riksbank's current guidance.
I think current core inflation, which is measured by CPIF, excluding energy, is around 0.5%, which is a target of 2%, and is expected to stay low for a few months. This is what has given the Riksbank the confidence to stay, or the license to stay on hold for a longer period. Now, of course, this low inflation is fundamentally driven by the VAT cut that was announced this year, earlier this year, and will reverse next year as the base effects kick in.
Like I mentioned, you know, nevertheless, these low contemporaneous inflation affords the Riksbank the luxury of not rushing into a hike, and I think recent developments in the Middle East with declining oil prices has also come to their aid a little bit. I think a hike will eventually come, as energy prices are not expected to go back to pre-war averages, in our mind, and the fact that ECB is raising rates, the Fed has done hawkish, the Nord Stream Bank has also raised rates, and hinted to increase further. All of these will kind of push the Riksbank to deliver a hike.
For now, we think they will hike in December, but as I mentioned, a lot will depend on upcoming inflation trends. Okay, so let's stick with Scandinavia, and you mentioned the Nord Bank in there, in terms of they've already raised rates. They had their meeting this week with the Nord Bank keeping rates on hold at 4.25, but indicated another hike is possibly on the way.
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