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GBP: Spot FX Looks Through Rates Vol as Inflation, BoE Pricing Backs Up GBP

GBP
CEEMEABulletUKGlobalForeign Exchange BulletsRegionMarkets
  • Spot GBP has proved resilient in post-Budget trade, with GBP/USD and EUR/GBP respecting the recent range, despite considerable vol in both Gilt markets and OIS-implied BoE pricing. This contrasts with the market reaction to the Kwarteng Sep'22 budget, wherein GBP sold off sharply alongside the acute pressure on Gilt prices.
  • This is likely as GBP is receiving some background support from the less dovish BoE pricing across 2025 (when increased Budget spending is expected to hit the economy in earnest) and more supportive conditions for services inflation (largely via wage pressures for lowest-paid employees and greater business costs) - as evidenced by the flattening pressures in the SONIA strip across H2'25.
  • Implied year-end pricing for GBP/USD remains relatively sanguine after the budget - looking through near-term vol in UK rates to keep the options-implied range for year-end broadly unchanged: 25.2% probability above 1.3250, 27.8% probability below 1.2750.
  • That said, 3m GBP vols against both EUR and GBP are seeing support, as back-to-back BoE cuts at the Nov, Dec meetings are called into question. The trend theme in GBPUSD is unchanged and remains bearish - an extension lower would open 1.2890, the Aug 18 low.
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  • Spot GBP has proved resilient in post-Budget trade, with GBP/USD and EUR/GBP respecting the recent range, despite considerable vol in both Gilt markets and OIS-implied BoE pricing. This contrasts with the market reaction to the Kwarteng Sep'22 budget, wherein GBP sold off sharply alongside the acute pressure on Gilt prices.
  • This is likely as GBP is receiving some background support from the less dovish BoE pricing across 2025 (when increased Budget spending is expected to hit the economy in earnest) and more supportive conditions for services inflation (largely via wage pressures for lowest-paid employees and greater business costs) - as evidenced by the flattening pressures in the SONIA strip across H2'25.
  • Implied year-end pricing for GBP/USD remains relatively sanguine after the budget - looking through near-term vol in UK rates to keep the options-implied range for year-end broadly unchanged: 25.2% probability above 1.3250, 27.8% probability below 1.2750.
  • That said, 3m GBP vols against both EUR and GBP are seeing support, as back-to-back BoE cuts at the Nov, Dec meetings are called into question. The trend theme in GBPUSD is unchanged and remains bearish - an extension lower would open 1.2890, the Aug 18 low.