Following a tumultuous end to 2015 where the Fed raised the Federal Funds target and the ECB lowered their main refinancing rate, investors, analysts and traders finished the year contemplating what’s next from the Bank of England.

While many analysts had pencilled in an upward move at some point in 2016, the initial market moves in Short Sterling futures suggest otherwise - the ICE Sterling December 2016 contract saw a strong rally in the first month of the year. At the end of the January, trading in the Sterling contract implied little change of a near-term shift in monetary policy, with the first shift priced in third quarter 2017.

Forward-looking indicators including oil and equities are driving the fixed income markets. For example, the front-month price of ICE Brent declined by 25% in the first part of January and has so far been the “ticker to watch” for macro managers. Bank of England Governor Mark Carney recently noted “the world is weaker and UK growth has slowed. Due to the oil price collapse, inflation has fallen further.1 After FTSE 100 and other global equity indices declined in the first three weeks of the year, fixed income markets are deciding whether this is short-term noise or a symptom of economic weakness waiting ahead.

“The market is seeing contrasting signals from the labour market, with unemployment falling whilst wage growth remains at 2% nominal. In real terms, the picture looks better,” says Chris Rhodes, Head of Interest Rates at ICE.

The recent volatility in financial and commodity markets and uncertainty over the likely path for monetary policy is supporting trading activity. ICE Short Sterling volumes have started the year strongly, with average daily volume (ADV) up 15% on 2015 and open interest up 12% compared with levels seen at the end of 2015. The focus now will turn to the February UK inflation report, due on February 4.

"With central bank policies shifting," continues Rhodes, "volatility in USD-denominated assets could support activity in GBP FX and interest rate markets."

Hedging Interest Rate Exposure

As macroeconomic changes spark activity in the interest rates market, lenders, asset managers, hedge funds and traders with exposure to UK interest rates are looking to hedge their exposure. To effectively manage their risk, market participants rely on the deep liquidity of ICE Short Sterling futures and options contracts.

With interest rate contracts ranging from three months to 30 years, the ICE interest rate franchise supports trading across the full curve. As monetary policies shift around the globe, ICE markets provide hedging solutions to help participants effectively manage price risk.