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Reflections #34 - Mind the Gap

UK core inflation surprised to the upside again with a strong 0.8% mom rise bringing the year-over-year increase to 7.1%.

Most of the upside surprise came from services, air travel, recreational and cultural goods and second-hand cars according to the ONS.

Not surprisingly UK front end rates jumped in expectation of more hikes from the BoE, which so far has hiked the policy rate from 0.1% to 4.5%. Market consensus has now moved to another 75bp in 2023.

What now? Most likely the pressure for yields is to the upside until demand falters eg. due to a slowdown in the mortgage market or supply issues resolve.

With the yield curve continuing to invert to the most extreme since 2007 (see chart 2), the divergence to GBPUSD is striking.

Something has to give in.


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