GBP - How to trade the dovish UK theme in 2025, Rates & FX + 10 key charts

Thoughts on trading the dovish UK theme here for those looking to play it in 2025:

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• Duration: We look for a move in 10yr Gilts to 4.25% in Q2. 10yr Gilts have decoupled from Bunds and look very American. They may share the same language, but not the same Macro outlook. ?Sub 1% growth in the UK y/y, with Q3 at 0%. Versus the US at 3%. The inflation momentum rebound we’ve seen looks more sustainable in the US than the UK. Services CPI is likely to hold up, but this MPC may be swayed more by growth concerns ahead.

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• STIR: We expect a Feb rate cut (17bps priced) and then the data to justify the BOE moving to a “per-meeting” cutting cycle from March to a terminal rate of 3.25% (markets price just 4.2% by September 25). The markets pricing of a rate cutting cycle was already mild before the UK budget, then the rosy OBR forecasts took a good amount out of the curve. We think this was the wrong message from the budget for what it means for the cycle. Instead we are getting clear signs from surveys of a loss of confidence in firms hiring decisions, due to the NI tax hike), which could lead to a slowdown in the PMIs in Q1/Q2.

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• FX: GBP to 1.23 in Q1 based on a) UK data to continue to underwhelm (data surprises are in a strong downtrend), b) we price in Feb more aggressively. But c) a lot depends on Jan 20th for the USD view. EUR/GBP is a very low Beta version of the view and one I wouldn’t be involved with but I would note positioning would imply GBP longs among hedge funds are concentrated in the pair and will be due a squeeze in the new year.

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• Curve: We think there is more steepening to come, especially if the front-end catches a bid. Markets will continue to be worried about UK finances and debt sustainability, which we expect will continue to hit the long-end the most.

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• Swap Spreads: Swap spreads remain depressed (30Y Gilt ASW are still around the Truss-moment levels). In some parts of the curve (10Y+), Gilts are now cheaper on ASW vs USTs. This is mostly a demand-supply mismatch (record levels of Gilt issuance) and a lack of love towards the UK credit. If the rate cut repricing that we expect materialises, we should see Gilts outperforming swaps as real investors should feel more confident in buying Gilts, which would help swap spreads find a floor.

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• Events ahead: The question is what will we get before the BOE’s 6th Feb meeting. In the short term very little until the 15th Jan CPI release, with nothing from now until 2nd Jan Nationwide house prices, 3rd Jan mortgage approvals, 9th Jan BRC, BOE DMP and REC report on jobs (will employment intentions continue to drop?). Then after CPI on 15th Jan we have RICs and IP (16 Jan), Retail sales (17 Jan), Labour (21 Jan) and flash PMIs (24 Jan).

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Ten Key UK Charts:

1. Will BOE’s rosy GDP forecasts hold up if PMI is in decline?
2. Inflation has been slightly above BOE expectations, but nothing to cause a hawkish turn.
3. The growth in Labour employment from the LFS looks odd compared to job cuts in the more timely PAYE measure. BOE to focus on dropping employment intentions in the REC and DMP reports instead. The LFS survey suffers from a low response rate and it’s odd it’s not following the high level of bankruptcies we’ve seen.
4. Less than three cuts are priced next year in SONIA futures looks too low to us.
5. If the UK curve really is American in nature, why is the UK swaps curve not following the US with steeper curves in 2s5s?
6. If History serves as a lesson, only in 1995 did long end Gilts selloff further from these levels since the start of the BOE cutting cycle.
7. Gilts are trading more in line with the US curve than Bunds, but with European levels of growth…
8. There’s been a lot of steepening in 10s30s
9. But our FV modelling would argue there is more to come.
10. UK remains cheaper on an ASW basis than the US

10Y Gilt vs 10Y UST / Bund together:

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Curve:

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?FV for Gilts is done using: 6m6m rate (as a proxy of CB path), 5y5y GBP inflation swap (as proxy of neutral rate), APF.

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GBP swap spreads (comparing UK and US):

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Jordan Rochester

Head of EMEA FICC (Macro) Strategy

Executive Director

Mizuho Bank, Ltd.

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Mizuho EMEA

30 Old Bailey

London, EC4M 7AU

t: +44 (0)20 7012 4091 |? m: +44 7350 374 124

[email protected]

mizuhogroup.com/emea | LinkedIn

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Please refer to the "Terms of Dealing for Foreign Exchange" on our bank website.

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Sources for all charts and analysis: Mizuho, Macrobond, Bloomberg

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