Risks skewed towards downside for GBP and UK yields on BoE easing – Danske Bank

Research Team at Danske Bank, estimates that just over 25bp worth of rate cuts at this week’s Monetary Policy Committee meeting has already been priced in by the UK money market, while the overnight interest rate is priced to fall to 0.15% by the end of 2016.

Key Quotes

“In the fixed income space, both 2Y10Y and 5Y10Y gilt yields curves have flattened substantially since the UK’s EU referendum, which implies that some expectations of renewed asset purchases have also been priced in.

If we are correct that the BoE will cut by 25bp and do more QE on Thursday, we think risks for interest rates and GBP are skewed on the downside despite relatively high market expectations, as we expect the BoE to maintain a very dovish stance signalling readiness to ease further if it finds it necessary. This should help underpin the market’s expectations for additional easing further down the road.

Thus, we expect yields to fall a bit across the gilt curve in the UK, while the 2Y10Y and 5Y10Y curves could see further flattening pressure. In the FX market, we see risks skewed towards a weaker GBP versus the EUR and USD on the announcement and we forecast EUR/GBP will rise to 0.86 in 1M.”