GBP Rates Seen as Overdone Amid Oil Price Uncertainty

The Bank of England's governor has expressed caution on multiple rate hikes in the UK, contradicting market expectations. According to ING Think, sterling rates have been pricing in a very hawkish narrative that may be overdone. The GBP curve is predicting almost three hikes over the next year, but Bank of England Governor Andrew Bailey pushed back against this idea in parliament.

ING Think believes the market is incorporating a risk premium, rather than genuine expectations. This means that any bet on GBP rates is also a bet on oil prices, which have been highly sensitive to geopolitical events. Every $10 increase in Brent has added around 15bp to 2Y sterling rates, more than the impact seen in EUR and USD rates.

The new Labour government adds another layer of uncertainty, with potential budget-related risks. While ING Think doesn't expect a material fiscal expansion, there is a possibility that more government spending could delay Bank of England rate cuts or even lead to further hikes.