19 Feb 2015
UK and US rates re-converging, will GBP gain towards $1.60? – SG
FXStreet (Barcelona) - Kit Juckes of Societe Generale, views that with UK and US rates re-converging, a shift in market pricing in the next few months in favour of the pound might lead GBP/USD higher towards 1.60 levels.
Key Quotes
“At the moment the UK rates market prices 1year swap rates (currently 75bp) at 1.24% in a year's time. But the market prices 1-year US rates (currently 51bp) at 1.28%. So over the next year the market is priced for US 1-year rates to rise by75bp, and for UK ones to rise by 50bp.”
“The fall in UK 1y/1y rates relative to US ones happened at the same time as the GBP/USD rate fell back 1.74 to 1.50.”
“I find it easy to imagine that in a year's time UK 1-year rates are at the same level as US ones, if not a bit higher. There are some nice trends in short sterling/eurodollar futures but more pertinently, if the market shifts its pricing in the next few months (either re-pricing Fed rate expectations down, or bringing forward the expected timing of a UK rate hike) GBP/USD can easily get back above 1.60.”
“All the more so if EUR/USD gets stuck in a range and the large (unsustainable?) long dollar position in the speculative FX market is reduced.”
“This doesn't alter my long-term view of the dangers to the UK from the most uncertain General Election I can remember, or from a huge current account deficit and a budget deficit that is dangerously big at this point in the economic cycle."
“I'll get back to bearish GBP/USD positions another day, perhaps closer to the election, perhaps when GBP/USD is back at 1.60.”
Key Quotes
“At the moment the UK rates market prices 1year swap rates (currently 75bp) at 1.24% in a year's time. But the market prices 1-year US rates (currently 51bp) at 1.28%. So over the next year the market is priced for US 1-year rates to rise by75bp, and for UK ones to rise by 50bp.”
“The fall in UK 1y/1y rates relative to US ones happened at the same time as the GBP/USD rate fell back 1.74 to 1.50.”
“I find it easy to imagine that in a year's time UK 1-year rates are at the same level as US ones, if not a bit higher. There are some nice trends in short sterling/eurodollar futures but more pertinently, if the market shifts its pricing in the next few months (either re-pricing Fed rate expectations down, or bringing forward the expected timing of a UK rate hike) GBP/USD can easily get back above 1.60.”
“All the more so if EUR/USD gets stuck in a range and the large (unsustainable?) long dollar position in the speculative FX market is reduced.”
“This doesn't alter my long-term view of the dangers to the UK from the most uncertain General Election I can remember, or from a huge current account deficit and a budget deficit that is dangerously big at this point in the economic cycle."
“I'll get back to bearish GBP/USD positions another day, perhaps closer to the election, perhaps when GBP/USD is back at 1.60.”