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Before the British Bank's resolution, it only set a price cut in interest rates once in mid-2026. What is the market afraid of?
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Hello everyone, today XM Foreign Exchange will bring you "[XM Foreign Exchange Market Analysis]: Before the British Bank's resolution, the interest rate cut will be cut only once in mid-2026. What is the market afraid of?" Hope it will be helpful to you! The original content is as follows:
The information volume this week is extremely high: two key central bank meetings, a state visit, and the US tech giant's investment xmaccount.commitment to the UK totaling approximately £150 billion has made the British market "heat" both macro and narrative at the same time. Sidely with this is a distinct policy differentiation - the Federal Reserve has cut interest rates and suggests that it may be "rapid" in the xmaccount.coming months; while in the UK, the market generally judges that the British Bank of China is almost impossible to cut interest rates today (September 18), and the probability of a rate cut within the year is only less than 30%.
Analysis pointed out that this is not a simple "eagle-dove difference", but a different constraint: if the troops continue to remain unchanged this time, the UK interest rate will still be at the highest ranks of G10, but it coexists with the higher inflation of G20, becoming an "outlier of the wrong cause". To make matters worse, the Office of Budget Responsibility (OBR) is expected to lower productivity expectations before the November budget, with potential growth rates downgraded, fiscal space tighter, and the space for "alternative use" of monetary policy is further xmaccount.compressed.
Inflation stickiness and interest rate path: Why it is difficult to "make a way for growth"
Quotes cuts according to xmaccount.common sense help improve cash flow discounting and interest burden, but British Bank's goal is price stability. The latest data does not cooperate: CPI in August was 3.8% year-on-year, and the prices of sub-items generally rose and none of them fell, which means that the deflation process stagnated and the price momentum is still rising. Traders are worried that rash relaxation may reignite inflation expectations, raise the nominal and actual maturity premiums, and ultimately push up long-term financing costs and offset the marginal positive for interest rate cuts.
In the interest rate path, interest rate futures are still priced only for one interest rate cut by mid-2026, reflecting the market's consensus on "slow motion". In terms of voting structure, Dhingra and RamsdeA few doves such as n may support relaxation, but it is difficult to change the overall situation. More likely xmaccount.communication is to reaffirm the “meet-by-meet decision-making” with the path of not being pre-committed. Although there is also a view that there is a risk of asymmetrical between "4.00% unchanged" and "further unexpected interest rate cuts", in the balance between the widespread upward pressure of inflation and the weakening of labor market and growth but not out of control, it is inclined to "stable first and then observe" to reduce the cost of policy misjudgment.
Signal of QT slowdown: The cost of long-term breathing and fiscal linkage
What attracts attention as the interest rate point is the rhythm of quantitative tightening (QT). The mainstream expectation is that the Bank of England will reduce its annual Treasury bond share reduction from 100 billion pounds to 70 billion pounds to alleviate the upward pressure on long-term British bond yields (which have approached nearly 30-year highs). Balance sheet logic shows that in recent years, bond prices have declined and yields have damaged the book value of bonds held, and interest payments on bank reserves have risen and need to be hedged through transfer payments from the Ministry of Finance. If the shrinkage QT is still not enough to balance the gap, the pressure may gather to the Chancellor in the fall budget, and it is not ruled out that it will be xmaccount.compensated by bank taxes and other means.
To the market meaning, QT shrinks the short term and long-term long term, and the interest rate spreads rise in a relief period, making the curve more likely to be "steep"; but the profit and loss redistribution between the fiscal-bank-central banks will return in the medium term in the form of uncertainty premium, causing variables in the sustainability and amplitude of the downward trend of the yield.
Scenario deduction between pound and British bonds
In terms of exchange rate, pound rose 0.9% against the US dollar in the past month, but fell 0.3% against the euro. Behind this is the "slow rise" of the UK yield curve: 10-year + 7bp, 2-year + 3bp, and 30-year + 14bp in the past three months, which is more moderate than the euro zone, resulting in limited interest rate spread changes and convergence of volatility, and the pound shows a "low wave mid-share". On this basis, three scenarios were analyzed:
Baseline (the highest probability): interest rates remain unchanged, emphasis is placed on decision-making at each session, and announced that QT was reduced from 100 billion pounds to 70 billion pounds. ——The duration is relatively beneficial, the curve is steep, the pound is mainly fluctuating in range, and is passive against the US dollar in the short term.
Unexpected easing (small probability): interest rates are reduced when inflation is not changed. ——Nominal and actual yields may be "down first and up", inflation xmaccount.compensation will rise; the risk of the lower edge of the pound against the US dollar will rise.
More hawkish (low probability): interest rates remain unchanged but not lowered QT or the wording is tougher. ——Long-term interest rates have risen again and financial conditions have tightened. The pound has benefited in the short term, but overall risk preference is under pressure.
External shocks are equally important: both the Bank of Canada and the Federal Reserve have cut interest rates, and the market's previous "hidden bets" of greater strength of 50 basis points have failed, which has instead pushed the US dollar to recover.
The above content is about "[XM Foreign Exchange Market Analysis]: Before the British Bank's resolution, the interest rate cut will be only once in mid-2026. What is the market afraid of?", which was carefully xmaccount.compiled and edited by the editor of XM Foreign Exchange. I hope it will be helpful to your transactions.help! Thanks for the support!
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