Sterling To Resume Its Decline Before Long Says Societe Generale

"Deeply negative combination of a sizeable current account deficit and significantly negative real interest rates," to scupper Sterling's recovery.

The Pound will resume its decline before long, according to economists at Societe Generale, as a series of fundamental headwinds conspire to derail its nascent recovery.

“We expect Sterling to resume its decline before long, as the macro data flow show further UK growth deceleration,” says Guy Stear, an economist at Societe Generale.

Stronger industrial data and an evolving debate around Bank of England monetary policy have boosted the Pound of late, making it one of the top three performing currencies in the G10 basket last week, and the best performer Tuesday.

The Pound-to-Euro rate rose 0.14% to 1.1114 during early trading in London Wednesday while the Pound-to-Dollar rate gained 0.22% to reach a new one-year high of 1.3316.

“Sterling is fundamentally affected by the deeply negative combination of a sizeable current account deficit and significantly negative real interest rates,” says Stear.

Societe Generale strategists recently forecast the Pound will continue strumming along the bottom of the proverbial barrel relative to the Euro, while it will probably remain in a narrow range relative to the Dollar.

An economy that has so-far avoided the more dire of post-referendum scenarios and rising inflation have helped shape a new consensus that policy makers might now look to raise rates sooner rather than later.

Expectations of more hawkish rhetoric from the Bank of England have mounted since Tuesday’s inflation data showed consumer price growth threatening the 3% threshold.

“The risks of a ‘hawkish hold’ this week – and a third rate hike dissenter joining the ranks – have increased; in the scenario of a 6-3 MPC vote split, the initial knee-jerk market reaction could see odds of a Nov BoE rate hike rise to 50%,” says Viraj Patel, a foreign exchange strategist with ING Group.

Off the back of recent price action in the Pound-to-Euro exchange rate, Patel has called an end to fears over the British currency falling to parity against the Euro, saying a sustained move below 0.9000 for EUR/GBP should be sufficient to shelve the narrative for now.

But the strategy team at ING also have doubts over the durability of Sterling’s rally, as late September and the October month will bring with them a raft of political risk events that are expected to put Brexit firmly back on the agenda.

“Any hawkish re-pricing in the UK rate curve is only likely to offer the pound a one-time boost; we would expect Brexit to once again recapture the narrative for GBP price action in Oct ahead of key political events,” Patel wrote in his morning note.