You have explained it in a way that makes it appear simple which is greatly appreciated. What is lost on me is why future interest rates were repriced based on nothing [obvious] changing. My guess is that there is quite a lot which is not obvious to me, but glaringly so to pros such as yourself.
I get a sense this comes back to a point I was struggling to make earlier this week in that I felt we are all in the business of trading expectations rather than the physical underlying as it is at any current point in time.
Martin, your explanations much appreciated. Thanks for taking the time.
No problem, I am happy to help.
Indeed, you're right, what has been happening recently in the UK rates mkt is a little esoteric and hard to understand outside of context. Specifically, the important thing to remember is that the BoE released an unscheduled statement (it's a relatively rare event) after the July MPC meeting, the first one that Carney chaired. So Carney came in with a bang. The wording of the statement was something along the lines of "implied rise in the expected future path of rates was not warranted by the recent developments in the domestic economy". That was the signal why rates (and currency) should reprice lower, which they did after Carney subsequently introduced fwd guidance. Since that time, however, "developments in the domestic economy" have gone absolutely gangbusters and, all of a sudden, Carney has stopped talking about the "unwarranted implied future path of rates".
All of this has really been very painful for some people who positioned themselves for lower rates after the first statement. Some of these people who were still clinging on to their "rates lower for longer" positions were hoping that there will be a statement out of the BoE today, which would repeat the "unwarranted rise" comment. When the BoE didn't release any statement, these people got washed out, which triggered stops and moved implied mkt rates sharply higher. The sharp spike in the currency was just a result of the move in rates.
