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vs STIR Spread: Has the GBP move just been a re-correlation move? (1/2)

GBP
  • There has been a lot of talk recently about the weakness of sterling over the past couple of months.
  • There are many reasons behind the move including:
    • The political outlook: Potential for the EU to retaliate if the UK revokes part of the NI Protocol and the fall in support for the ruling Conservative party (considered more market-friendly than Labour still - even though Labour have shifted notably to the right since Starmer's leadership began).
    • The growth outlook: The UK is doing less than most European countries to support consumers with rising energy bills. And at the same time is increasing national insurance (a form of payroll tax paid by by employees and firms). Both of these while the UK economy is still adjusting to the structural changes of both Brexit and the pandemic.
  • However, it is the relative rate outlook that can still be considered to be a big driver of the moves in the pound. The UK began hiking rates and QT before the Fed and the UK's neutral rate of interest is considered to be considerably lower than that of the US. So the UK rate hike cycle is at a completely different stage to the US or Eurozone. UK hikes are likely to slow as the neutral rate is approached, while rates are still comfortably in accomodative territory in both the US and the Eurozone.
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