Deutsche Bank strategists Shreyas Gopal and Sanjay Raja note that UK front-end rates have seen the largest hawkish repricing among G10 central banks, removing earlier dovish expectations for the Bank of England. They argue this shift, together with short-covering, has supported the Pound recently, but warn that lower energy prices and a reversal in front-end rates could unwind this support.

BoE repricing underpins short term Pound

"At the end of last month the Bank of England was priced comparatively dovishly to peers both in absolute terms (over two full cuts priced) and relative to the spot real rate, as measured by policy rate minus the six-month annualised change in core CPI."

"As of the time of writing, however, there's now just over 10bps of cuts priced for the entire year."

"Away from the likely large impact of position unwinds, the best macro explanation is that fears over inflation expectations staying sticky could prevent the BoE from looking through the energy shock and continuing to cut."

"From a currency perspective, the terms of trade impact has been the dominant driver of relative performance, but the sheer magnitude of the UK repricing vs peers has likely combined with an unwind of short positioning to support the pound in the short term."

"A continued fall in energy prices and reversal in front-end rates could in turn see that source of support also reverse."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)