GBP: Modest Performance Amidst Rate Hike, Equities Lag Behind Eurozone Peers

GBP: Some underperformance

The Bank of England's broad trade-weighted index for sterling has barely budged since last Thursday's 50bp BoE rate hike, where sterling strength against some currencies presumably makes up for some modest weakness against the dollar and the euro. 10-year UK gilt yields - which had briefly fallen on the large hike - equally have barely budged. Where sterling bears may find some solace is that UK large and mid-cap equities have only rallied 0.7% this month - compared to 3% gains for their European peer group.

In short, we think it is too soon to start selling sterling on hard landing fears. We think sterling only sells off when the data - both inflation and labour market data - suggest the BoE can ease up in its hawkishness. Until then GBP/USD might find some support near 1.2600 and EUR/GBP could easily drift back under 0.8600.