Since the beginning of the year, the United Kingdom confirms durable growth numbers and doesn’t seem that much bothered by pending Brexit negotiations that are most likely to last up to 2021 instead of 2020, as painful free-trade agreements still straggle. UK December 2017 GDP Y/Y reached 1.80%, slightly below 2016 data presented at 1.90% and expected to stabilse in January 2018 in Y/Y basis.
Based on the February inflation report, the UK economy starts growing at a more vigorous pace and inflation is expected to reduce as today’s BoE Interest Rate is maintained at 0.50%, same level since November 2nd 2017. Speculations of a rate hike in May 2018 are increasing as the Monetary Policy Committee confirmed a more optimistic view of economic growth and that it intends to increase interest rates faster than previously anticipated, increasing estimated probabilities of May 5th 2018 BoE meeting to raise interest rates of 25 bps by up to 70%.
Accordingly, 10-y Treasury Bonds started increasing by 6.25% at 1.65. The announcement also impacted equities forcefully, decreasing FTSE100 and FTSE 250 of -0.83% and -1.06% respectively while GBP/USD and GBP/EUR pairs strengthened by +1.03% and +1.09% at 1.40 and 1.14. At-the-money 3-months put/call option prices implied volatility decreased by -0.67%.
In our view, the UK economy is signalling strong economic stimulus, boosted by continuing exchange pass-through advantage induced by June 2016 Brexit Referendum outcome and constructive Brexit negotiations. In this backdrop, we see no further setback to a BoE interest rate of 0.75% in May 2018, as an inflation target of 2% is considered whereas December 2017 inflation rate remains at 3%.
by Vincent Mivelaz
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