UK Rates Strategy: BoE in Focus, Risk-Reward Still Favours Receiving September MPC

Research evidence excerpt

UK Rates Strategy: BoE in Focus, Risk-Reward Still Favours Receiving September MPC

IdeaMnegligible, the market is likely to focus increasingly on the possibility of a near-term move,

potentially as soon as September. We have recommended receiving September MPC for

some time and continue to find the trade’s risk-reward compelling, with around 19bp of

tightening currently priced in ( Exhibit 1 ).

Even under a more hawkish MPC scenario, we would expect the market to retain some

probability of a hold in September. Given the limited likelihood of a meaningful 50bp tail,

expected tightening should remain below 25bp, most likely at around 21–22bp. This would

imply only around 2–3bp of adverse repricing from current levels.

The meeting is still several weeks away, however, and geopolitical developments could

shift expectations materially in either direction. Front-end rates continue to exhibit a high

beta to energy prices, and September pricing is therefore likely to remain particularly

sensitive to developments in the Middle East ( Exhibit 2 ).

A prolonged closure of the Strait of Hormuz would clearly challenge our receiving

recommendation. Under a more disruptive scenario, the market could move towards fully

pricing a 25bp hike. Conversely, a de-escalation could trigger a rapid retracement in hike

pricing. As we see little likelihood of the market assigning a meaningful probability to a

50bp move, we continue to favour holding the trade on risk-reward grounds.

Exhibit 1: Cumulative BoE tightening priced by meeting Exhibit 2: September MPC cumulative pricing versus front-

month gasoline prices

bp

80 bp USd/gal. 72.7 March MPC

67.9 70 380 70

58.9 60 360

48.9 50 340

40 320

40 35.8 30 300

30 20 280

19.2

20 10 260

0 240

2.9

-10 220

-20 200 Jul Sep Nov Dec Feb Mar Apr