BOE: Pill says BOE forecast exchange rates 50/50 as random walk/UIP
Pill asked on how exchange rate movements are put into the forecast:
"Forecasting exchange rates is notoriously difficult. So what we do is take a kind of rule of thumb, and that rule of thumb, says, we take a weighted average, 50/50, weighted average between assuming the exchange rates are unchanged... a random walk assumption and 50% that the exchange rate will evolve depending on the interest rate differentials that are built in to our forecast in different jurisdictions... the uncovered interest rate parity condition to produce a forward path for the exchange rate, and we take a kind of weighted average, because each of those approaches has its strengths and weaknesses, and by taking something in between, we feel like we have a relatively robust conditioning assumption around which to build a forecast, and a good understanding of what that is, we can understand what the sensitivities of that forecast to the evolution of foreign exchange markets, and indeed other factors would be. I also think it's important to emphasise that those forecasts, by nature, are not cast out in guarantees. No forecast is and in fact, it's as much about how those forecasts form a basis for a good discussion amongst the committee and hopefully lead to a good policy decisions as a result and it's as much about the uncertainty surrounding those forecasts in the manner that Fergal described earlier, with the influence of uncertainty on business decisions like investment decisions or household decisions like saving decisions, it's as much about the uncertainty that we're focused on as it is about any point estimate of where inflation activity, or other key indicators in the economy would be at any point."
Q&A ends
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STIR: Repo Reference Rates
- Secured Overnight Financing Rate (SOFR): 4.40% (+0.07), volume: $2.658T
- Broad General Collateral Rate (BGCR): 4.37% (+0.06), volume: $1.062T
- Tri-Party General Collateral Rate (TCR): 4.37% (+0.06), volume: $1.020T
- (rate, volume levels reflect prior session)
US TSYS: Early SOFR/Treasury Option Roundup: Evaluating Latest Tariff Volley
SOFR & Treasury option flow centered around upside calls overnight, modest volumes so far as desks evaluate China's latest response to US raising levy to 104% yesterday with 84% tariff on US imports this morning. Underlying futures under pressure (10Y yield at 4.4367% at the moment), curves steeper but off overnight highs (2s10s currently +7.319 at 63.432 vs. 73.847 high). Projected rate cuts through mid-2025 have consolidated slightly vs. late Tuesday's levels - still pricing in a full point by year end, however. Current levels vs. late Tuesday (*) as follows: May'25 at -13.4bp (-14bp), Jun'25 at -37.9bp (-38.2bp), Jul'25 at -61.4bp (-61.6bp), Sep'25 -78.4bp (-79.3bp).
- SOFR Options:
- Block, 3,000 SFRU5 97.50/98.50 2x3 call spds, 10.5 ref 96.50
- 2,000 SFRH6 94.62/95.62 put spds ref 96.825
- 2,000 SFRM5 95.75/95.93/96.18/96.38 call condors ref 96.12
- over 8,100 SFRJ5 96.00 calls, 18.0 last ref 96.115
- 4,500 SFRU5 96.50/97.00 call spds ref 96.435
- 2,000 0QK5/2QK5 97.25 call spds
- 2,000 SFRM5 96.75/97.50 call spds vs. 2QM5 97.50/98.25 call spds
- 2,000 SFRM5 95.75/95.81/95.88 put trees ref 96.085
- Block/screen, 13,000 SFRM5 96.50/97.25 call spds ref 96.125
- Block, 5,000 SFRK5 95.81/95.93/96.00/96.06 broken call condors, 5.0 ref 96.155
- Block, 4,000 SFRM5 95.62 puts, 1.0 ref 96.18
- Treasury Options:
- 3,500 FVM5 110.5/111 call spds ref 108-07
- 2,000 FVK5 106.25/106.5/107/107.25 put condors ref 108-04.25
- 2,000 wk3 TY 110.75/112 strangles ref 110-22 (exp 4/17)
- over 4,600 TYM5 112 calls, 60 ref 110-24
- over 10,300 USK5 113 puts, 143 last
- over 11,000 USK5 116 calls, 131 last
- 5,200 USK5 117/120 call spds, 25 ref 114-12 to -11
- over 6,000 TYM5 112.5 calls, 50 last ref 110-30.5 to -31
- 1,000 TYK5 112.5/113.5/114.5/116.5 broken call condors ref 110-27
- 1,300 FVM5 107/107.5 put spds, 13 ref 108-08
- 2,500 TYK5 112/113 call spds ref 110-26
GILT PAOF RESULTS: GBP22.75mln of the 4.375% Mar-30 Gilt sold.
- GBP1.125bln have been on offer.
- This leaves GBP18.335bln of the gilt in issue.
