How Much Further can the GBP Rally Go?

It’s been an exhausting few months for the UK. An energy crisis, Trussenomics, Kwasi Kwarteng, LDI blowups, BoE QE, BoE rate hikes and now the potential for fiscal austerity. One of the interesting themes in markets since Rishi Sunak has taken over as Prime Minister in the UK has been that GBP has been a fairly consistent out-performer in FX markets. GBPUSD is up more than 11% since its September lows and trade weighted sterling is up nearly 6% since then. The transition from Truss to Rishi has been a massive anchor in UK fixed income and has led to a fairly material re-rating in FX terms as well. The market trusts Rishi is the message, and in the context of the current softening in risk premium in global markets, sterling has been given an extra boost off of its very depressed levels. The question now is, especially as budgets become a smaller part of the UK market narrative going forward, are we headed back to our regularly scheduled programming in the UK? Rishi is a lot better for markets than Truss, but not much else has really changed from where we were pre Truss/Kwasi.

What was “regularly scheduled programming” in the UK?

• Tight labor markets with accelerating nominal wage growth

• A dovish central bank relative to the implied market rates path

• High levels of spot inflation

• A fragile economy in the face of a series of shocks