(MENAFN- ING) Sterling rates should settle for 3.25% landing, but budget still brings uncertainty

Sterling rates are still in a guessing game when it comes to the landing zone of the Bank of England, causing quite some volatility throughout the curve. Since 'Liberation Day' in April, markets have mostly been focused on a terminal rate around 3.5%, but that handle seems to have been broken to the downside on the back of more dovish data. Tuesday's higher unemployment and weaker wage growth were yet another reading suggesting more room for cuts than previously thought.

Going forward, we think markets should become more confident about 3.25% as the terminal rate, but the budget announcement on 26 November does add some uncertainty to the mix. A fiscally prudent approach would involve tax hikes and spending cuts, which would support a more dovish Bank of England stance. But our risk premium estimates suggest this scenario is broadly priced in already. If, on the other hand, Chancellor Reeves fails to win markets' confidence in the UK's fiscal discipline, then we could very well see the curve move higher again.

Markets shifting from a 3.5% Bank of England landing zone to 3.25%

Wednesday's events and market views

Eyes are on US politics as the House of Representatives prepares for the next crucial vote to end the government shutdown. However, risk sentiment is increasingly driven by concerns about the jobs market, as illustrated by the market reaction to the disappointing ADP weekly payroll data on Tuesday.

Wednesday is a light day in terms of data, though. Italy will publish industrial production figures, but these don't tend to move markets. From the US, we have MBA mortgage applications, which, given the cancelled and delayed government data, should get more attention than usual. In terms of central bank speakers, we have the ECB's Schnabel talking about European reforms and the Bank of England's Pill will speak at a monetary research conference. Potentially interesting Fed speakers include Williams, Bostic and Miran.

Germany will auction 21Y and 31Y Bunds for a total of €2.5bn and the US has 10Y notes on the agenda totalling $42bn.

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