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Sterling compounded by political risk

China’s central bank again helped risk sentiment overnight after they vowed to protect consumers exposed to the housing market, while also injecting more cash into the banking system. This has been the the clearest sign yet that authorities could move to contain contagion risks.

A speech yesterday from BoE Governor Andrew Bailey saw him reinforce the option that interest rates could rise as early as this year if inflation was to become more persistent. These remarks coupled with Brent crude oil prices tipping above $80 saw the 10-year UK gilt rally to a 28-month high (see Reuters chart). The push higher in sterling however was short lived after news of a potential snap election as early as next spring emerged. Sterling continues to remain exposed to the risk sensitive news, with news out of China and now political risk key drivers.


US bond yields have also been driven higher by inflation concerns and since the hawkish shift at the Federal Reserve, which announced last week it may start tapering stimulus as soon as November and flagged interest rate increases may follow sooner than expected. The US 10-year yield touched a 3-month high of above 1.52% (see Reuters chart).


The result of the German election went entirely as expected. Markets expect coalition talks to last weeks, not days with the most likely outcome a combination of the SPD, the FDP, and the Greens. The sooner a coalition is agreed the better it will be for the euro.

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