RBC Point To Vanilla Rates Play Nature Of GBP, Short Vs. NZD Into UK CPI

RBC write “GBP is a mild outperformer in 2023 so far. We see this being pinned on everything from Brexit (the ditching of the NI Protocol Bill and likely ditching of Retained EU Law Bill in its current form) to broader political stability. In reality, since the volatility last autumn, GBP has become a fairly vanilla nominal rate expectations story, with outperformance vs EUR reflecting a small widening of spreads in GBP’s favour.”

• “GBP certainly did carry a large premium for political risk during Truss’s brief spell as PM, but this unwound almost immediately as she left office and the link to rate spreads was quickly reestablished.”
• “Where does that leave us? Pushing back against what feels like an increasingly positive consensus. The ~50bp of further hikes priced into SONIA forwards contrasts with our view that the debate should be between one further hike and no further hikes.”
• “Tomorrow’s April CPI release is critical in this respect. Even an in-line release (8.2% y/y from 10.1%) could see that debate shift.”
• “We are tactically short GBP ahead of the data (vs NZD in this week’s “Trade of the Week”).”