British Pound Link to Carry Trades Best Explained by Interest Rate Expectations
There wasn’t much in the way of UK data on hand at the start of this week, so why was the British pound the third strongest major currencies (lagging behind the Aussie and Loonie)? With the Bank of England’s Bank Rate set at an ultra-low 0.50 percent, yield obviously was not a driver of the British pound. Instead, the currency has been making headway during times of broad-based risk appetite thanks to climbing interest rate expectations. Indeed, according to Credit Suisse overnight index swaps (OIS), the market is pricing in 104.5 basis points worth of rate increases by the BOE over the next 12 months, beating out rate hike expectations for the rest of the central banks for the majors currencies. Just behind the BOE, the Reserve Bank of Australia and the Bank of Canada are projected to hike by 98 basis points and 96.4 basis points, respectively, during the next 12 months.
Interestingly enough, rate expectations for the UK are at their highest since June 11, and it seems like GBP/USD will not be able to break above resistance at 1.6600/1.6700 until OIS start to price in more aggressive increases. At the same time, we have to consider the potential impact of risk trends, as another bout of risk aversion could easily send GBP/USD reversing from its June and July highs.
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