NEW YORK – The pound’s unexpected rally in 2023 may have finally run out of steam as the Bank of England (BOE) moves closer to wrapping up its tightening cycle.
Analysts and investors at firms including BNP Paribas, NatWest Markets and State Street forecast that officials will deliver just one more interest rate hike, compared with market expectations for two more. They are all bearish on the pound.
The British currency has been on a downward trend since reaching the highest in over a year in mid-July, and extended those losses last week after the BOE raised rates by a quarter point.
The decision, along with signs that the economy is on a shaky footing, had traders who once bet the key rate would climb past 6.5 per cent see it reach 5.75 per cent.
It all makes the pound much less compelling to investors who seek out currencies that offer a high carry – or the gain obtained from differing interest rates – as well as strong economic growth.
Britain’s housing prices are falling fast and a gauge of manufacturing data is at recessionary levels.
“Sterling investors will start to price in an increasingly gloomy economic outlook,” said Mr Luca Paolini, chief strategist at Pictet Asset Management. “Economic surprises have become increasingly less positive and run the risk of being outright disappointing in the coming months.”
Pictet downgraded the pound to underweight from neutral last week, citing a gloomy outlook for the UK economy.
The BOE has delivered 14 rate hikes since late 2021, taking the key rate from 0.1 per cent to 5.25 per cent last week after a 25-basis-point hike.
Voting for the latest move was far from unanimous, with monetary policy council members defending a hold, as well as a quarter-point and a half-point hike.
“I do not think we will get more than one” hike, said Mr Lee Ferridge, a strategist at State Street. “And depending on the data over the next two months, we may not even get that one.”
An earlier than expected pause from the BOE would jolt rates markets, with short-term bond yields falling to account for the new peak rate – and possibly taking the pound with them.
Mr Ferridge sees sterling falling below US$1.20 over the next two to three months from US$1.27 on Friday, and recommends a short position against the yen and the US and Canadian dollars.
Swaps tied to the central bank’s meetings imply borrowing costs peaking at 5.75 per cent by early 2024, meaning two quarter-point hikes are fully priced in and there is some chance of a third and final move.
BOE governor Andrew Bailey’s promise to keep rates elevated for longer is unlikely to put a floor under the pound’s slide.
