More Losses Forecast for Pound Sterling vs. Euro and US Dollar by ABN Amro's Boele

Above: Georgette Boele, ABN Amro.

The Pound has stabilised ahead of the weekend following a sharp drop in reaction to the Bank of England's policy event on November 2. But we should expect further losses says one analyst we follow.

Analysts at ABN Amro - the Dutch-based global financial services provider - have confirmed they see Sterling edging yet-lower over coming days and maybe weeks as a result of recent events at the Bank of England.

It’s been a rough day for Sterling - the currency is easily the worst-performing global currency despite the Bank of England raising interest rates o.25% and taking the base rate back to 0.5%.

The Pound-to-Euro exchange rate has traded lower to 1.1204 having been as high as 1.1404, the Pound-to-Dollar exchange rate is at 1.3066 having gone as high as 1.3298 at one point.

It appears that a significant profit-taking sell-off is underway - a ‘buy the rumour sell the fact’ type of trade. However, the decline in the value of Sterling could also reflect an emergent view that the Bank of England is not likely to raise interest rates again in the near future.

Above: A bad day at the office for Sterling.

Recall, and we have been saying this for days now, for Sterling to rally markets want to hear an unambiguous communication that future interest rate rises are in the pipeline.

This was confirmed with Carney saying further rate rises would be required to get inflation back down to target, but still the Pound is being sold.

“The sharp deterioration in the Pound has been a classic case of ‘buy the rumour, sell the fact’, coming just a week after we saw a similar thing for the ECB meeting. Despite the fact that 7 of the 9 MPC members decided to raise rates, there is a good chance that this is essentially ‘one and done’,” says Joshua Mahony at IG in London.

The accompanying statement from the Bank noted that “all members agree that any future increases in Bank Rate would be expected to be at a gradual pace and to a limited extent”.

The statement also omitted the communication it set out previously that it would raise interest rates by more than financial markets were currently expecting. We don’t find this as a surprise as we have just seen that unexpected interest rate delivered; recall before September the first rate rise was priced for 2019!

The Bank said it expected inflation to "fall back over the next year and, conditioned on the gently rising path of Bank Rate implied by current market yields, to approach the 2% target by the end of the forecast period".

Its projections were based on the assumption that Bank Rate would rise to 0.7% next year which implies one rate rise in 2018.

“Given this forward guidance, financial markets scaled back their expectations for interest rate hikes going forward, which supported gilts, but weighed on Sterling,” says Georgette Boele at ABN Amro. “Our base case is that the BoE will leave interest rates on hold in the coming months.”

ABN Amro reckon economic growth will likely remain moderate, with the risks tilted to the downside because of the uncertainty related to the shape of the eventual Brexit.

In addition, inflation should come down as the impact of the depreciation Sterling should wane. Governor Mark Carney stressed that future moves will be entirely dependent on the direction of inflation.

So should inflation fall faster-than-forecast, the case for another rate rise is diminished.

“Given this macro and BoE outlook, we expect Sterling to soften further,” says Boele. “It is likely that EUR/GBP will again rise towards 0.90 in the coming weeks. Moreover, Sterling will probably weaken versus the US Dollar as well. GBP/USD could drop towards 1.30 in the near-term.”

EUR/GBP at 0.90 gives a GBP/EUR exchange rate at 1.11.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.

Services PMI Lifts the Mood, UK GDP Forecasts Upgraded

The British Pound edged higher against the Euro and Dollar during early trading Friday after the all-important Services PMI from IHS Markit and the CIPS rose faster than was expected for October.

The services sector accounts for about 80% of the UK economy and news that it is now growing at its fastest pace in six months understandably lent support to Sterling which has suffered notably over the past 24 hours.

October’s purchasing manager’s index (PMI) reading came in at 55.6, up from 53.6, when it had been forecast by economists to edge downward by a fraction.

Activity in the services industry, Britain’s most important commercial sector, rose at its fastest pace since April. Resilient client demand and a solid rate of new orders were cited as being among the factors behind the move.

“The good news was that October saw business activity across services, manufacturing and construction grow at its fastest rate for six months,” says Chris Williamson, chief business economist at IHS Markit.

The news confirms the UK economy is looking to end the year on a stronger-than-anticipated note, and while data is unlikely to propel the Pound to notable new highs, it does at least provide the grounds for a strong base to form.

"The pound managed to find stability overnight, and with this morning’s blockbuster services PMI reading, we are finally seeing the pound regain some ground. The surprise jump in services sector growth in October brought about the highest PMI reading in six-months, causing Markit to upgrade their Q4 GDP estimate to 0.5%," says Joshua Mahony at IG.

RBC Capital Markets are also upgrading their GDP forecasts on the basis of the latest survey data saying their PMI-based GDP modles suggest that if these levels were to prevail for the rest of 2017, Q4 GDP growth would be 0.5% q/q.

"This is significantly above our current forecast of 0.2% q/q, and after a stronger-thanexpected Q3 growth rate, we acknowledge that there is now some upside risk to that Q4 forecast," says Sam Hill, Senior UK Economist with RBC Capital Markets.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.