ING: The GBP - FJElite

Gilts took another blow yesterday, underperforming European peers. The 10-year is now eyeing 5.5%, and the 30-year is very dose to 6.0%. Sterling held up well yesterday, confirming this was a purely externally driven move in gilts (which simply have higher beta to US Treasuries) and not caused by heightened fiscal concerns.

Chancellor John Healey’s pledge to budget discipline is working in that sense. But it equally highlights how limited the room for any pro-growth government measure is. That, among other things, sits at odds with markets’ mammoth bets on monetary tightening: 48bp by year- end, HObp by July. Our baseline is still that the Bank of England won’t hike at all, leaving sterling in front of a potential cliff-edge dovish repricing.

UK GDP surprised to the upside this morning, rising 0.4% MoM after June's strong 0.3% gain. Around half the increase came from IT, continuing a familiar trend. With IT accounting for roughly 7% of the economy but contributing a third of the UK's 1.5% annual growth rate, there may be an AI story emerging here. GBP is a tad stronger on the back ofthat, but these monthly growth prints have not had much impact on BoE decisions.

We continue to see upside room for EUR/GBP and downside for GBP/USD, with 4Q targets of 0.87 and 1.33.