Francesco Pesole at ING argues that despite stronger United Kingdom (UK) Gross Domestic Product (GDP) data and resilient Sterling, the move in Gilts is largely externally driven and not about domestic fiscal fears. ING maintains its view that the Bank of England will not hike further, warning of a potential dovish repricing and targeting higher EUR/GBP and lower GBP/USD into the fourth quarter.

BoE seen resisting further tightening

“Gilts took another blow yesterday, underperforming European peers. The 10-year is now eyeing 5.5%, and the 30-year is very close to 6.0%. Sterling held up well yesterday, confirming this was a purely externally driven move in gilts (which simply have higher beta to US Treasuries) and not caused by heightened fiscal concerns. “

“Chancellor John Healey’s pledge to budget discipline is working in that sense. But it equally highlights how limited the room for any pro-growth government measure is.”

“That, among other things, sits at odds with markets’ mammoth bets on monetary tightening: 48bp by year-end, 110bp by July. Our baseline is still that the Bank of England won’t hike at all, leaving sterling in front of a potential cliff-edge dovish repricing.”

“UK GDP surprised to the upside this morning, rising 0.4% MoM after June’s strong 0.3% gain. Around half the increase came from IT, continuing a familiar trend.”

“GBP is a tad stronger on the back of that, but these monthly growth prints have not had much impact on BoE decisions.”

“We continue to see upside room for EUR/GBP and downside for GBP/USD, with 4Q targets of 0.87 and 1.33.”