GBP/USD was 1.3220 on the Bank of England’s 4pm rate on 12 October, and the 30-year point on the Bank’s fitted gilt curve was 6.01% on 9 October. Every sterling note I read blamed both figures on the Budget. The Bank’s own curves show gilts pricing little extra UK risk into the 28 October Budget. The pound’s fall since 10 September came during a dollar rally that hit the euro harder, and futures already hold a bearish view on sterling. I expect GBP/USD near 1.3222 on 29 October, with the risk skewed lower. My target is one pip above the forward, and I’d put the Budget risk in the tails and in futures more than in gilt spreads.
GBP/USD Eyes 1.3222 as the Dollar Outweighs UK Budget Risk
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Key Points:
- Gilts price little extra UK risk into the Budget: I measure the 5-day average spread of the 25-year gilt over the Bank of England's OIS curve at 74.8 basis points on 9 October, 2.1 more than on 17 July.
- GBP/USD's fall came in a dollar rally: from 10 September to 12 October the pound lost 2.3% against the dollar while the euro lost 3.9%, so by my arithmetic sterling ended 1.7% higher against the euro.
- Futures already hold the bear case: asset managers' net short in CME sterling futures equalled 54.7% of open interest on 6 October, the largest share in the CFTC's weekly reports, which begin in 2006.