Things fell apart for sterling on Monday after dovish messaging from MPC members and a spate of dour data materially raised the odds of a rate cut.
Gertjan Vlieghe’s comments (to FT) in favor of a move came hot on the heels of Silvana Tenreyro, who expressed some concern about the economy late last week.
Apparently, the “Boris bounce” ain’t sustainable. “The shift in the MPC rhetoric could suggest that the ‘Boris bounce’ in the wake of the general election we and the market were hoping for may not live up to expectations”, Credit Agricole’s Valentin Marinov said Monday.
That’s a sizable move in the top pane – the pound fell some 0.8% after monthly GDP data showed the economy unexpectedly shrank in November. The read through from the 0.3% MoM contraction in the lead-up to the December election is that the economy needs to have expanded between 0.1% and 0.2% last month in order to prevent a Q4 contraction.
The services sector shrank 0.3% in November, the largest drop in nearly two years. Markets are now pricing in a 45% chance of a BOE cut versus just 25% on Friday.
The pound has now fallen for five straight days. Gilts obviously rallied. Five-year yields are at the lowest since early last month.
This may well be exacerbated by a suddenly-wrong-footed market.
“CFTC data show a dramatic switch in speculative sterling positioning, flipping from a big short to a big long in just over four months”, SocGen’s Kit Juckes said Monday.
Remember, the UK still needs to negotiate a post-divorce trade deal with the EU by the end of the year. Just last week, Ursula von der Leyen called that time table “impossible”.