The formal introduction of forward guidance by the UK MPC failed to anchor rate expectations in August as the economic data showed continued strength. Indeed, the 2-year overnight-indexed swap rate rose a little more in the UK than in the US, seemingly putting upward pressure on the pound against the dollar. The yield of 10-year Gilts also rose by around 50bp, much more than the 20bp rise in the yield of 10-year Treasuries. Given the relative outlooks for UK and US monetary policies, we doubt this underperformance will last.
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