Unlikely that UK budget will shock bonds or pound
Oct 30 (Reuters) -The situation in 2022 when a "mini-budget" was blamed for the dive in the pound's value and a rise in bond yields was very different to that today, and whatever is revealed in Britain's budget later on Wednesday, a shock is much less likely.
In 2022 both the U.S. and UK central banks were raising interest rates and it was the Federal Reserve's decision to raise the U.S. interest rate by 75 basis points that was the biggest market mover at that time.
That big increase set the tone for markets with traders globally adjusting to the reality of an aggressive tightening cycle that routed long-held investments in bonds.
Because interest rates had dropped so low for so long, bonds had been largely forgotten, with those who once traded them looking elsewhere to make money, while investors stuck to a strategy that saw them buying loads of bonds that had nowhere to go after yields met the zero bound.
With little expertise left in the market, and lot of complacency the resulting carnage that ensued when bond markets woke up as interest rates rose is history and the mini-budget merely added to the turmoil.
Since then interest rates have peaked and are heading back down, bonds are well traded and as a result those invested in them are better hedged. Prior investment strategies where bonds were heavily favoured have been abandoned.
Given stratospheric rises for equities since September 2022 there may well be too little invested in bonds now. A future shock is far more likely to have roots in equity markets.
As for the pound it has surged over 11% on a trade-weighted basis since the mini-budget shock and the record GBP/USD low that resulted. Following the recent failure of the GBP/USD rally from 1.0347 in September 2022 to1.3434 a few weeks ahead this budget, there is a risk that traders who are still gambling on a rise pare their bets, but little cause to fear another shock.
The trade-weighted pound is at an important level though, reaching 107.42 this month which means it has almost retraced 61.8% of losses resulting from Brexit. A rise over 107.85 could led to much larger rally but given the extent of the downtrend since 1981, this may be the point to bet on a resumption of pound's slide.
For more click on FXBUZ
Trade-weighted pound and cable https://tmsnrt.rs/3C474HH
Jeremy Boulton is a Reuters market analyst. The views expressed are his own; Editing by Alison Williams
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