British Pound: Sterling stability challenged by narrowing carry – Deutsche Bank

Deutsche Bank's Shreyas Gopal observes that market speculation on Bank of England (BoE) rate hikes falters as meetings approach, resulting in a stable pound and narrow EUR/GBP range. However, a probable 6-3 vote to keep rates unchanged may now cause sterling to weaken due to its Euro carrying advantage diminishing. As meetings near, excitement subsides, and pricing settles near zero, pushed out further.

This aligns with the Bank of England's "buying time" approach, which has effectively kept the pound stable this year. Yet, the delaying strategy may no longer be suitable, as a 6-3 vote to hold rates and unchanged guidance is unlikely to prevent sterling weakness. The pound's Euro carry advantage against the euro is narrowing, having peaked after accounting for the fall in implied volatility.