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Shock BOE Hold Reunites Pound, Yields as Traders Slash Rate Bets

Shock BOE Hold Reunites Pound, Yields as Traders Slash Rate Bets

It took a shock Bank of England decision holding interest rates to rekindle the link between the pound and gilt yields. 

After policy makers delivered the decision to stay pat, sterling and yields fell together instantly. The currency slumped 1.4% to break below $1.35, its biggest drop this year. Two-year yields plunged 17 basis points in the steepest decline since the pandemic began. Five-year rates were on course for their largest slide since the Brexit vote.

Shock BOE Hold Reunites Pound, Yields as Traders Slash Rate Bets

The moves came as traders unwound aggressive bets on rate hikes, with money markets having priced about a 15-basis-point increase ahead of the meeting. Those wagers had kept two-year gilt yields near the highest in two years, while the pound languished near the lowest this year on concerns growth would suffer if the BOE delivered the 100 basis points of tightening markets had expected into 2022.

“The press conference in particular must surely go down as one of the worst pieces of communication since the BOE gained independence in 1997,” said Aaron Rock, an investment director at abrdn plc in Edinburgh. 

The tandem moves in the currency and yields on Thursday contrast with some bouts of decoupling since mid-September. After traders started pricing in three BOE hikes for 2022, the pound set a year-to-date low while two-year rates climbed to the highest since the pandemic began. Then when money markets upped the ante to start betting on a 15-basis-point increase this month, yields jumped while sterling fell. 

Beyond holding rates Thursday, policy makers also pushed back against market pricing for a series of hikes from the current 0.1% to 1% next year, noting that such aggressive action would leave price growth below its 2% goal at the end of their forecast period.

After the decision, traders pushed back bets on the first 15-basis-point increase to February. They now see the bank rate rising to 1% in November next year, compared with August previously. 

©2021 Bloomberg L.P.