LONDON – sterling has fallen more than 9% against the US dollar so far this year and despite the recent delay, currency strategists see additional pain for the pound.
IN Bank of England delivered last week another increase in interest rates by 25 basis pointsmore cautious move than colleagues like US Federal Reserve and Swiss National Bankas it seeks to curb rising inflation without exacerbating the slowdown in economic growth.
In addition to the global problems caused by the war in Ukraine and supply chain problems, the United Kingdom is also focusing on the effects of Brexit, internal political uncertainty and major cost of living crisis.
Although cautious so far, the bank said it was ready to act more violently if inflation, which is Currently working at 9% and which, according to the Monetary Policy Committee, will exceed 11% in October, is proving more persistent. Analysts expect this to mean an increase of 50 basis points, which could be made on the table in the next few meetings if inflation forecasts weaken.
Goldman Sachs Analysts said in a note Sunday that BoE’s more cautious approach to curbing inflation to mitigate the impact on growth is “negative for the currency, in line with the 5% depreciation of mid-March.”
“But conversations with our customers and positioning indicators suggest that this is a popular view – Sterling’s sentiment is quite negative and it is trading as if it is well positioned,” said Goldman strategists Zack Pandl and Kamakshya Trivedi.
“We and the market interpreted this week’s policy statement as a slight easing of” transitional “inflation. However, some MPCs seem to have a high bar for what could qualify as “more sustained” inflationary pressures, and BoE’s actions continue to stand out from their DM counterparts. “
As such, Goldman continues to see a further lower performance of the pound, especially as the European Central Bank seeks to facilitate credit protection and tighten its own monetary policy more quickly. However, Pandl and Trivedi added that “the risk-reward of sterling shorts has deteriorated somewhat.”
In the meantime BNP Paribas In a quick note last week, strategists reiterated their sword calls for the pound due to “deteriorating economic prospects, increased political risk and (their) view that the Bank of England will provide less tightening than the market price.”
BNP Paribas holds a long position against the euro against the pound, targeting 89 0.89. The euro traded just under 86 0.86 on Monday.
IN The UK economy contracted by 0.3% in April after a contraction of 0.1% in March, the first consecutive decline since early 2020, and the Bank of England noted the growing risk of recession in late 2022 and early 2023.
Monetary policy and inflation of the bank compared to its competitors are likely to be the biggest determinants of the fate of sterling, according to Mark Colliati, director of global capital markets at Validus Risk Management.
Kolyati said in a note Thursday after the bank’s latest announcement that the current inflation trajectory leaves “little opportunity for the MPC to take its feet off the gas” when it comes to tightening monetary policy.
“The fact that real interest rates (adjusted for inflation) remain lower in the UK than in the US or the EU does not bode well for sterling,” Kolyati said, adding that broad risk sentiment would also be an influential factor.
History tells us that sterling tends to perform lower when markets are in a “risk-exclusion” mode, so with the S&P 500, which is now officially in the bear market (ie 20% below its recent peak), there is a risk that sterling will remain under pressure in the short term, especially against the safe haven dollar. “
At its two-year low last week, the pound fell below $ 1.20 before recovering more than $ 1.24 following a decision by the Bank of England and settling at around $ 1.2260 on Monday.
A complete reversal of the recent downward trend will require a rally above $ 1.25, according to Saxo Bank FX Strategy chief John Hardy, who also noted that sterling bears will feel comfortable only after the pound sinks back to $ 1.22.
“Elsewhere, hopes for British pounds should look at the EURGBP, where the last deviation above 0.8600 was sharply reversed, creating a better defined turnaround,” Hardy said.
“Observe the 0.8500 zone for whether we are following lower and back in the range below 0.8300 there again.”