Greg Gibbs, Director at Amplifying Global FX Capital, suggests that the big currency move since end-Sep has been a further sharp fall in the GBP related to renewed Brexit fears, notwithstanding stronger than expected UK economic data.
“The fall in the GBP has ignited higher inflation expectations in the UK, contributing to higher long-term yields in the UK, and perhaps spilling over into higher bond yields globally, even though these higher inflation expectations should be contained to the UK.
The most recent plunge in the GBP since end-Sep has been associated with higher UK yields across the curve and sharp curve steepening. This indicates that in recent weeks a significant risk premium to compensate investors for Brexit has now been priced-in to the GBP and its rates market. Sentiment towards the GBP will remain weak for some time, and we may see little-sustained recovery in the GBP, but equally it may begin to stabilize with the prospect of further rate cuts largely off the table and fiscal stimulus by the UK government in the works.”