When it comes to the UK, good news is bad news. The economy grew beyond expectations in the year's second quarter, and wages are accelerating, rising the fastest since July 2021. Although that doesn't sound bad, it should be enough for the Bank of England to ring alarm bells concerning inflation and reconsider its monetary policy. Moreover, the unemployment rate surprised to the upside, rising 4.2% versus 4% expected. Therefore, not only does the BOE not have inflation under control, but the economy is quickly deteriorating!
It leaves policymakers only one option: for the Bank of England to hike rates aggressively and fast in a desperate attempt to avoid remaining the last hawk standing as central banks pause and prepare to cut rates in other parts of the world. That opens up the possibility for a 50bps rate hike in September, which, if delivered, will leave markets no choice other than pricing a higher premium on Gilts. As a matter of fact, the rationale behind the BOE's interest rate hikes is becoming more and more blurry, with the central bank switching from 50bps to 25bps rate hikes without accurate forward guidance. That implies that Gilts will remain volatile and elevated until the market has a more precise picture of the economy and monetary policies.
Two-year Gilts are in an uptrend, with the RSI breaking above 60, implying that yields might rise further. If they break above 5.5%, they will find resistance at 5.9%, the highest yield since 2007. Yet, for 2-year yields to rise that much we will need to see markets betting on the BOE peak rate to be well above 6%.