In our March monthly we recommended positioning for lower UK short-term rates based on our weakening long-leading indicator, and we later recommended taking advantage of GBPUSD seasonality – which has seen cable higher in each of the past 13 Aprils – to sell any rallies. These trades have played out as we expected, and may have further to go, although the easy money has likely already been made.

Our long LEI (top chart) has paused its downward momentum for now, however weaker data has started coming through and markets are expecting the Bank of England to turn more dovish over the next year. UK CPI figures disappointed in March and April, as did last month’s GDP release. Consumer confidence is currently hovering just above the post-referendum low (bottom-left chart). Since early March, markets have been pricing in fewer Bank of England rate hikes for the coming 12 months (bottom-right chart) as data have deteriorated. The pound made gains following the end of the tax year, but the recent sell-off, driven by this month’s GDP and CPI figures, has erased these gains.

(Click on image to enlarge.)

Charts supporting UK rates

Source: Bloomberg, Macrobond and Variant Perception