The Pound and the Inverted Yield Curve: Implications for GBP as a Reserve Currency
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GBP: A sharply inverted yield curve can come in handy
The pound’s neutral reaction to the Bank of England’s 50bp hike yesterday would suggest that was a well-telegraphed outcome. Instead, markets were only pricing in 35bp before the meeting. The market impact of the BoE’s surprise move must therefore be seen in the context of the pricing across the Sonia curve.
150bp of tightening was already priced in before the meeting, and investors are now looking at a 6.0%+ peak rate after the hike. The attempt by the BoE to get ahead of the curve with more aggressive tightening is being accompanied by rising speculation that this will trigger monetary easing starting in the summer of 2024.
Still, that price development is not enough to impact the highly inverted shape of the GBP yield curve. From a currency perspective – as we note in the BoE review note – a sharply inverted yield curve can work as a positive factor for a reserve currency like the pound (as opposed to growth-sensitive currencies). We suspect that a rebound to 0.88 in EUR/GBP will need to be delayed on the back of that.
The data calendar includes PMI releases in the UK today, with consensus expecting a marginal deterioration for both manufacturing and services. This morning, retail sales for the month of May declined less than expected.
