President Biden joins his NATO, G7 and EU counterparts to discuss the month-long war in Ukraine; focus here will be on whether the US and Europe agree on additional sanctions. We remain constructive on the USD outlook broadly and anticipate continued strength against the low-yielders in particular as US rates push higher.
The GPB was rescued from losses into the mid-1.31s by a solid beat in PMIs data published today, while still holding to a 0.1/2% decline on the session and a failure to recoup the 1.32 handle. The country’s composite PMI came in at 59.7 vs 57.5 expected and 59.9 previously, with the services sector index—climbing 0.5 points compared to a 2.5 points drop in manufacturing—behind the bulk of the resilience in the headline reading. However, prices charged inflation jumped to a record high (since 1999), which combined with the war in Ukraine, saw business optimism fall to a 17- month low. Gilts are again outperforming Bunds and USTs—although UK yields are up today versus yesterday’s decline. UK debt led yesterday owing to a significantly lower than expected debt issuance plan released by the DMO alongside Sunak’s budget update (the GBP ignored the news). The Chancellor announced a £9bn support plan for households that included tax cuts, a lower fuel duty, and increased grants, but the OBR estimates that Brits will still face a 2.2% decline in disposable incomes over the 2022 fiscal year. The OBR’s projections also provided some insight into how the BoE’s forecasts will change in its May MPR. The estimates show that a bank rate of 1.61% by end-22 that peaks at 1.9% in Q3-23 (as implied by market pricing ahead of the forecast exercise) is accompanied by inflation falling to 1.2% in Q1-24. Market pricing was depressed in the sampling period owing to Ukraine war risks, which means that similar BoE forecasts due out in May that incorporate a 2% Bank Rate by year-end (and almost 2.25% in Feb 2023, latest OIS pricing) would likely show a larger undershooting of inflation. Markets should take the OBR’s forecasts (and their implication for the May MPR) as a sign that the BoE will not move as quickly as hike bets imply and will likely have to push back against hawkish expectations soon. We believe the GBP faces downside risk to 1.28 on a re-pricing of BoE expectations while the Fed moves ahead and meets market pricing.
