British Pound Bears Risk Being Caught Short: Swissquote

Those expecting further depreciation in Sterling risk being wrong-footed by a potential recovery in the UK currency suggests Peter Rosenstreich, an analyst at Swissquote Bank who believes the markets are too negative on Sterling.

The call comes amidst a difficult period for Sterling which has over the past month fallen against all currencies, apart from the New Zealand Dollar.

More specifically, Rosenstreich believes the market has got it wrong when it comes to timing the first Bank of England interest rate rise.  

In Rosenstreich’s view, conditions are pointing to a December move in bank rates “that will catch the GBP bears short.”

The value of Sterling relies heavily on the inflows of foreign capital from investors seeking out yield on UK assets. A higher rate at the Bank tends to raise the rate of return across multiple UK investments.

A number of economists surveyed by the BBC believe that the Bank will only raise interest rates in a year from now.

Therefore, Sterling would have to adjust if consensus were proven wrong, and the Bank raised rates earlier.

The risks of such a move have also been flagged up by both Barclays and ING Bank; we report today that analysts see the potential for stabilisation in Sterling as the Bank turns more ‘hawkish’ and agitates for a rise in rates to ensue inflation doesn’t unnecessarily rise.

Indeed, it is argued that dynamics surrounding the Bank will be more important for Sterling over coming weeks than Brexit.

“Sterling is now close to an historic low against the Euro in trade-weighted term – a reality not lost on the Bank of England,” says Rosenstreich also pointing to the inflation dynamic.

UK inflation sits at 2.6% and could go as high as 3.0%, any further fall in inflation risks pushing the rate even higher.

The Bank’s Monetary Policy Committee has said that a 20% decline in the GBP could equal as much as +1.5% in inflation.

BoE Governor Mark Carney has suggested that exchange rates must influence the bank’s policies.

“Should the pound weaken on slowed economic growth (rather than worries about Brexit), then the BoE is likely to hike rates.  Current GBP depreciation is due to both the economy and to Brexit. Economic data has been soft, but should inflation and activity suddenly pick up, the BoE will quickly go hawkish,” says Rosenstreich.

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