Sterling Money Markets Swing on Oil Price Fluctuations

The sterling money market rates have been swinging significantly due to changes in oil prices. For every $10 increase in oil prices, the 2-year gilt yield rises by around 15 basis points.

With Brent oil at $100, markets are pricing in more than four hikes from the Bank of England over the coming year, which would bring SONIA to around 4.75%.

The author believes that markets have turned too hawkish on the Bank of England and sees value further out the money market curve.

However, trading this market is difficult as any further escalation in the Middle East could immediately push interest rates higher again.

The central bank's communication is more dovish than market pricing, according to the economist, who does not expect the BoE to hike rates. The labour market has cooled significantly over the past year, limiting second-round inflation risks.

Liquidity costs may still rise in future as quantitative tightening continues to withdraw reserves from the system and banks increasingly rely on the Bank of England's liquidity facilities.