What the UK might have had in mind

The UK, being a developed, modern country, might have looked to the Reagan years, for a suitable comparable about likely market movements,

Back then, “Morning in America”, a big expansion in the budget, at a time of monetary tightening, resulted in the dollar exploding higher.

The UK reaches into the trusty policy kit, thinking “I am a student of history”.

Morning in America for me, but not for thee, as it turns out. The pound collapses (the below is real effective exchange rates to August, so it misses the last week’s worth of madness, but the long run pattern is overall useful).

Now, whilst the last few days might have seen some marked moves in the pound, and in gilts, overall, it’s not that different to what has happened elsewhere. Above, you can see that it is mostly about US dollar strength, and below, all yields are repricing inline with US monetary policy, and broader inflation concerns.

The pound may well have some risk premia creeping in. The whole “overshooting model”, in which FX rates appreciate in line with real rates, as the explanation of why uncovered interest rate parity holds in the long run and not at all in the short run, is predicated on assets being substitutable.

The market might not be viewing UK gilts through the same lens as any other.

Overall, it’s not great, for the UK, but not as bad as you might have read.

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