FXStreet (Delhi) – George Cole, Research Analyst at Goldman Sachs, notes that the GBP weakened relatively little vs USD following US payrolls, as UK frontend rates followed the US higher while the BoE’s ongoing focus on Sterling suggests that the UK curve will continue to take its lead from the US.
Key Quotes
“In our view, the reaction in GBP confirms that US data still matters for the UK curve. As we have written previously, the Bank of England’s focus on the disinflationary impact of Sterling strength given the low starting point for inflation – something that was reiterated at last week’s meeting and Inflation Report – has meant that the UK curve is currently sensitive to US data. Because Sterling exchange rates are a key input to policy, external shocks find their way onto the UK curve rather than simply the exchange rate. Indeed, following Friday’s US employment report, UK frontend rates repriced higher – the 2year rate moved around 5bps higher, the most out of the G10 (other than the US of course, which moved around 8bp higher).”
“This suggests to us a continuation of the recent pattern of the UK curve taking its lead from the US; despite the lack of hints from the BoE that lift-off is in any way imminent. This is likely to lead to some moderation in GBP vs USD; However, resilience in the domestic economy, particularly the labour market, will ultimately lead to policy divergence with the Euro area and GBP strength vs EUR. We leave our GBP forecasts unchanged, and expect GBP/$ at 1.46 and EUR/GBP at 0.65 in 12 months.”
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