Market News & Insights
8 February 2018

Sterling Volatility Risk with BOE and Inflation

Yesterday was interesting from the point of view that the dust had settled somewhat and market players were keen to see what the follow through of the “crash” had in store. It certainly wasn’t calm anyway and there was another rollercoaster day in store as large gains through the early session were erased with major US indices lower on the day. There is still the feeling that things have not quite settled down just yet. Europe was generally firmer however while overnight Asian bourses were also mostly higher as well so the pressure seems to be more US focused for now following the global rout Monday/Tuesday. US yields continue to press higher and with that the question now being raised is what happens to the equity markets we’ve known for the last 8/9 years. What happens to demand for equities as US yields rise back above 3%? The USD is certainly showing its backbone as it’s recovered almost 2.5% from Jan lows (USD index) in line with rising US yields. There is still some clouds on the horizon and another government shutdown risk is just around the corner after a temporary extension.

We mentioned yesterday that throughout the large moves in equities, currencies stayed relatively benign. We didn’t see large risk off moves favoring traditional safe havens like JPY and CHF, and the recent safe haven favorite, the euro, was also little changed the first two trading days of the week. That changed yesterday when we saw very heavy selling of euro, net supply of €3.5 bln across one platform, which looks like a large liquidation of euro long positions which saw EURUSD drop through support and it now trades over 2% below its February highs. Euro selling was across the board and the single currency now finds itself at the back end of its fastest decline since last October when the ECB announced there would be no fixed end date to asset purchases. Currently there appears to be little demand for the single currency.

Sterling will be focused on Super Thursday today, and while we may see some shorter term volatility in GBP pairs, but unless the BOE offer up a significant change in tact then focus will return to Brexit talks. There is no change expected from today’s BOE meeting, and the inflation report should show the general view the inflation in the UK has peaked and should recover towards the 2% target within the BOE’s horizon. UK real wage growth still remains negative, inflation is falling however and currently the BOE will be hard pressed to argue and shift in policy either way. Needless to say this will all be closely watched.