UK stuck between transatlantic policy divergence

It now looks odds on that the US Federal Reserve presses ahead and raises interest rates next week, while on the other side of the English Channel, the ECB has already loosened policy further. The UK lies somewhere in between, with the next move in interest rates still likely to be up, but not for some time. Indeed, we still think that confidence in the economic outlook will prompt the MPC to hike rates in Q2 2016. Accordingly, UK government bonds look vulnerable. Meanwhile, sterling looks set to strengthen against the euro as interest rates rise. But we expect further falls against the dollar, as the Fed tightens policy quicker than the markets expect. This should leave the trade-weighted exchange rate holding broadly steady over the next couple of years.