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The divergence between cable and the 2yr......>

FOREX: The divergence between cable and the 2yr swap spread has started to
narrow. The divergence has previously been driven by rising US rates, with DXY
trading at a discount to trade-weighted swap spreads.
- We highlighted the cable-swap spread back in June and suggested that the
divergence would correct as a result of sterling taking another leg lower, a
broad dollar rally, higher UK rates or lower US rates.
- So far the driving force has been a sharp drop in US rates as monetary policy
expectations have been revised. Moreover, we have noted recently the striking
divergence in US and UK implied rate probabilities. With the OIS market starting
to price in the possibility of a 2019 Fed cut, while the GBP OIS pricing is
still on the side of a hike (although the probability has been scaled back).

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