Sterling looks vulnerable to renewed falls

Recent turmoil in financial markets has seen UK interest rate expectations go on something of a rollercoaster ride recently. It wasn’t all that long ago that a rate hike this year still looked a possibility. But this appears to have been blown out of the water. Indeed, in the midst of the market mayhem, expectations for the first hike moved all the way to October 2016. Granted, the minutes of September’s MPC meeting sought to play down concerns about adverse global developments, and markets now expect the first hike to occur in August 2016. We still think that the markets are being too cautious about the outlook for interest rates, and continue to expect the first hike to occur in Q2 2016. However, given that we think that the markets are currently under-estimating the degree of monetary tightening which will need to occur in the United States over the next few years to keep inflation in check, sterling looks vulnerable to renewed falls against the US dollar.