At the end of another tumultuous week in global financial markets, one of the most notable developments in the UK has been the further drop in interest rate expectations. But even after the shaky start to the new year, we still think that a rate rise in 2016 is more likely than not.
It would be tempting to blame the drop in rate expectations for the recent sharp fall in sterling. However, rate expectations have been falling elsewhere too, suggesting that sterling-specific factors, notably the possibility of a “Brexit”, are playing a role. Given these concerns are only likely to intensify, while worries about the UK’s big current account deficit are still lingering, we now expect a further depreciation in the trade-weighted sterling index.
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