GBPUSD slipped below 1.1900 this morning after breaking below the psychologically important 1.2000 level yesterday. As noted in the prior update, it’s remarkable to see the marked weakness in sterling despite the marking taking UK short rates sharply higher – with 2-year UK swaps over 100 basis points higher from the lows early this month. The Bank of England has expressed a determination to get ahead of the inflation spike and the market has priced in a bit more than a 50-basis-points-per-meeting pace for the three remaining BoE meetings of 2022. But is that sufficient given the UK’s structural short-comings and external deficits? Currency weakness risks adding further to spike in inflation this year. The BoE can take a couple of approaches in response: continue with the 50 bps hikes while bemoaning the backdrop and trotting out the expectation that eventually, economic weakness and easing commodity prices will feed through to drop inflation back into the range. Or, the BoE can actually get serious and super-size hikes even beyond the acceleration the market has priced, at the risk of bringing forward and increasing the severity of the coming recession. Until this week, the BoE’s anticipated tightening trajectory had prevented an aggravated weakness in sterling in broader terms, but the currency’s weakness despite a massive mark-up of BoE expectations has ratcheted the pressure on sterling and the BoE’s response to an entirely new level.
Turkey shocked with a fresh rate cut yesterday of 100 basis points to take the policy rate to 13.00%. This with year-on-year inflation in Turkey at 79.6% and PPI at 144.6%, and housing measured at 160.6%. The move took USDTRY above 18.00, though it was a modest move relative to the size of the surprise. Turkish central bank chief Kavcioglu said that the bank would also look to “further strengthen macroprudential policy” by addressing the yawning difference between the policy rate and the rate commercial banks are charging for loans (more than double the official policy rate), as the push is to continue a credit-stimulated approach, inflation-be-darned.
Table: FX Board of G10 and CNH trend evolution and strength.
Note: a new color scheme for the FX Board! Besides changing the green for positive readings to a more pleasant blue, I have altered the settings such that trend readings don’t receive a more intense red or blue coloring until they have reached more significant levels – starting at an absolute value of 4 or higher.
So far, most of the drama in sterling is the lack of a response to shifts in the UK yield curve, the broad negative momentum has only shifted a bit here, but watching for the risk of more.