A gauge measuring sterling's strength reached its highest level since the 2016 Brexit referendum, reflecting aggressive pricing of Bank of England rate hikes.
Resilient UK economic data has given the BoE room to keep rates higher for longer. Markets now embed expectations for additional tightening, and higher UK real rates are drawing capital inflows into pound-denominated assets.
Fixed-income investors face acute duration risk in gilts as rate hike probabilities firm. A higher terminal rate increases price sensitivity across the curve, particularly in the long end, where 10-year gilt yields have compressed sharply.
Sticky inflation or sustained UK growth would reinforce the BoE's hawkish bias, likely driving further compression in credit spreads as traders lock in higher rate expectations.
