Accepted wisdoms don't always hold true...

 

We write this on the move, so this really is just a pointer to the two Bloomberg articles... which you should read if possible.

ref:- "Currency Traders Are Betting the Bank of England Is About to Make a Mistake", Bloomberg Markets

ref:-"The BoE Risks Hiking Too Far Ahead of the Fed", Bloomberg Economics

The first piece actually appeared on Bloomberg late on Monday (though it's been updated since) and the second expands on why sterling is suddenly in pretty bad odour amongst FX traders... well, some of them, anyway. We refer back to them in light of the raft of articles and opinion pieces popping up almost everywhere we look that centre on the increasingly hawkish noises coming out of the Bank of England, and whether that is such a good thing or not.

The initial report informs us that bearish bets against UK sterling are growing at the fastest pace in 2/12 years, even as BoE officials hint more and more openly at imminent policy tightening in response to the spike in inflation that has gone further than expected, and looks likely to last longer too. But wait a minute... isn't it the case that higher rates, especially if they're the result of a responsible attitude to keeping inflation under control, should be supportive of the currency?

Well, yes... and for the most logical and fundamental reasons too. But not if the market believes the central bank action to be premature, overdone or likely to miss it's intended target. If at the same time it damages growth prospects at the most delicate time, then that's bearish for the currency and will have the opposite effect to what one might normally expect.

We know why tightening monetary policy might act as a brake on growth, but the second piece tells us why it is also unlikely to have its desired effect against inflation. Simply put: higher rates won't lower gas/oil prices, they won't train more lorry/truck drivers, and they won't produce more computer chips.

True enough... and set next to the UK's continuing post-Brexit issues (N. Ireland) and not-very-inspiring domestic political situation, there would seem to be plenty of legitimate reasons to sell the Pound. But the UK currency is often full of surprises, and even when it does tank (Brexit vote, Covid onset) it can recover very sharply, so have a care. Besides, things don't always happen the way logic and perceived market wisdom suggest... but of course that's almost back to where we started.