UK: Collapse in rate expectations drove turn in GBP - Westpac

The combination of deteriorating UK data, more divergent and hostile Brexit talks, increased domestic political tensions and clear indications from the BoE that the potential of a rate move in May had been substantially reduced saw a sharp turn in GBP, according to Tim Riddell, Research Analyst at Westpac.

Key Quotes

“This combination also triggered sharp pullbacks in short dated UK rates.”

“Although poor weather during Q1 18 had been expected to see data undershoot expectations, the downturn was greater than mere weather effects would have implied. This was highlighted by ONS in their Q1 GDP assessment and by surveys such as the Markit/CIPs PMI. Not only has this pushed back the likelihood of a move from BoE this quarter, markets are now questioning any move in 2018. This latter assessment has been triggered by the impasses building in Brexit negotiations and pressures in domestic politics that may be expressed in this week’s local elections.”

“The USD rebound is adding to the above and driving GBP/USD towards the low 1.30s.”