Citi: Deeper Losses await Pound Sterling against the Euro and Dollar

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Foreign exchange analysts at the world's largest primary dealer of foreign exchange say the British Pound will retreat towards 2022's lows over the coming months.

Citibank's latest currency analysis shows the Dollar is likely to spike back to its recent highs again and the Pound is at unsustainable elevations owing to expectations for the UK economy to materially underperform that of the Eurozone and U.S. in 2023.

Ross Hammond, FX Counsellor at Citi's Wealth Management division, says although the tide will turn against the Dollar, it will likely be predicated by a final peak.

"Citi prefers to express this through higher Beta FX currencies, and those more so exposed to housing sensitivity and interest rate risk, such as GBP & CAD," says Hammond.

Vasileios Gkionakis now leads research on the Pound in his role as head of European FX strategy at Citi, and his views will ultimately inform the subsequent guidance offered by dealers such as Hammond.

Gkionakis has consistently been bearish on the Pound since the Brexit vote of 2015 and continues to cite Brexit as a reason to expect perpetual underperformance.

Indeed, Citi's FX research team describes the UK's economy as one "burdened by structural weakness as a result of Brexit".

They say continued concerns over inflation levels will also add to the gloom.

Citi forecasts a sharper and longer recession in the UK than other major economies as a result, citing the economy's exposure to housing market vulnerabilities.

This puts them in line with the consensus:

The housing market is also said to be a source of potential weakness for the Pound.

"We note additionally, that in times of housing market turbulence, the UK tends to experience outflows in equities and bonds, a scenario not necessarily beneficial for the GBP given the Current Account deficit expectations to continue growing," says Hammond.

UK house prices fell 2.3% from October to November this year, the biggest monthly drop since October 2008, according to bank and mortgage lender Halifax.

Citi says house prices matter for the Pound and researchers cite the 2008-2009 episode as proof, given both house prices and the Pound plunged in value alongside each other.

But the causes of the current housing downturn are very different to that of 2008-2009 when a global financial crisis gutted funding from the system leading to a housing market slump.

2008 also saw significant capital outflows from the UK's finance-heavy economy, which precipitated a fall in the value of the Pound.

2022's house price declines meanwhile come as a result of rising interest rates (which can in fact be supportive of Sterling).

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Nevertheless, "as we enter into the new year markets expect the GBP to reverse some of its recent positivity, highlighting in particular a forecasted 1.10 short-term target against USD," says Hammond.

Citi's FX strategists meanwhile cite China as a reason to expect a slump in the value of the Pound against the Euro.

"Looking out further into the new year, a major factor being considered for major currencies is the development of the Zero Covid Policy in China," says Hammond.

"Regarding the GBP, an unwinding here is likely to benefit the Euro from a geographical standpoint and given the economic exposure in relation to the GBP," he adds.

However, again this theory is contested.

Pound Sterling Live this week published Danske Bank's view that the Pound will appreciate against the Euro in 2023 as the industrial slowdown in the Eurozone will weigh on the 'industry heavy' single currency.

All told, the Pound to Dollar exchange rate is forecast by Citi to return to 1.10 over a one- to three-month timeframe but recover to 1.26 on a six- to 12-month timeframe.

The Pound to Euro exchange rate is forecast to fall to 1.14 on a one- to three-month timeframe and extend the fall to 1.0980 on a six- to 12-month timeframe. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)

This makes Citi one of the most bearish institutions on the Pound for the coming year.