Fathom StRRiM rises to its highest level of the year

The Fathom StRRiM (Sterling Relative Risk Metric) has risen to its highest level this year, as uncertainty over monetary policy has added to existing political uncertainty.

Refresh the chart in your browser | Edit chart in Datastream

Want more charts and analysis? Access a pre-built library of charts built by Fathom Consulting via Datastream Chartbook in Thomson Reuters Eikon.

Following this month’s Bank of England MPC meeting, and the announcement that three MPC members had voted to increase interest rates, last week we received important speeches from two MPC members. First, Governor Carney stated that “now is not yet the time” to begin raising rates. Indeed, he spoke of wanting to assess evidence “over the coming months”, suggesting that, for now at least, he is not minded to vote for tighter policy any time soon. The pound fell and short sterling interest rate futures rallied as markets pushed back expectations of an imminent rate rise. However, Bank Chief Economist Andy Haldane followed up with a hawkish speech on Wednesday, where he argued that a reversal of the 25 basis point cut enacted after the Brexit vote last year would be “prudent relatively soon”. Markets changed course once again, and are now fully pricing in a 25 basis point increase in interest rates by the middle of next year.

In our central view, UK monetary policy is on hold for at least the next two years. Nevertheless, we do see a risk that last year’s futile 25 basis point post-referendum cut is reversed. With the UK macroeconomic outlook set to deteriorate through the second half of this year, any modest tightening would need to happen sooner rather than later. On that basis, August would be the most likely month for a move.

All three major components of StRRiM — foreign exchange, fixed income and equities —are now in positive territory, meaning that relative risk in all sterling markets is higher than the norm. With heightened political uncertainty likely to remain for some time, the metric is likely to remain elevated until the future of monetary policy is resolved.

______________________________________________________________________

Thomson Reuters Datastream

Financial time series database which allows you to identify and examine trends, generate and test ideas and develop view points on the market.

Thomson Reuters offers the world’s most comprehensive historical database for numerical macroeconomic and cross-asset financial data which started in the 1950s and has grown into an indispensable resource for financial professionals. Find out more.