Pound a Sell against Dollar says Soc Gen

Image © Adobe Images

The Pound is "in trouble" says an analyst at Société Générale, who is looking for a fresh decline in the Dollar to transpire.

"GBP/USD is at risk of again falling below 1.20 in the very near term," Soc Gen strategist Olivier Korber says in a note dated August 09.

Korber says the fundamental rationale behind the trade is compelling, citing the worrying forecasts put out by the Bank of England last week that showed UK inflation was set to peak at "a whopping 13%".

Furthermore, the Bank of England's economists expect a four-quarter recession to start in the fourth quarter of this year.

The contrast with the U.S. economy's outlook is meanwhile stark, according to Korber.

"The unexpectedly positive US employment report last Friday is in sharp contrast with the grim UK economic outlook. Recession fears are now receding in the US, and the debate has started on whether or not there will be a second consecutive 75bp Fed hike. With room for further sterling shorts, GBP/USD is at risk of again falling below 1.20 in the very near term," says Korber.

The U.S. economy added 528K jobs in July, a number that more than doubled the 250K jobs the market was expecting and aided a rebound in the U.S. Dollar.

The Dollar rose against the Pound, Euro and other major currencies after the U.S. Bureau of Labor Statistics said the boost in jobs pushed the country's unemployment rate down to 3.5% from 3.6%.

The jobs data will shore up expectations for the Federal Reserve to continue its policy of pursuing aggressive interest rate hikes, which is in turn supportive of the Dollar.

Korber notes the recent July rally in Sterling-Dollar looks in fact to be a mere bounce within a more determined downtrend.

"If this channel holds, GBP/USD will trade between 1.14 and 1.20 in one month," says Korber.

Risks to the bearish Sterling thesis is that the Bank of England's forecasts for a long and enduring UK recession turn out to be wrong and there are numerous economists we follow who have said as much.

Forecasts for a long-running recession have been branded unrealistic by Savvas Savouri, Chief Economist and Partner at hedge fund Toscafund Asset Management.

In fact, the Bank is so wrong in its predictions the economists who drew up the predictions will be "embarrassed" and will choose to omit their time at the Bank from their CVs, says Savouri.

"I do not accept that a statistical recession looms. Yes, we might, just might see real GDP fall in Q2. Thereafter, I see little or no chance of what the BoE projects will be another decline in Q4, followed by its staggeringly-stupid prediction of SIX further sequential falls," says Savouri in a note following the Bank's August 04 decision to raise interest rates.

"How can an economy not grow when employment levels are rising thanks to unprecedented hiring intentions and so too, wages?" asks Savouri, noting the UK's strong jobs market and hiring intentions at businesses.

"Which sectors does the BoE in its "wisdom" predict will misfire to the extent they create a labour market reversal? The answer is that no reversal is possible for all sorts of reasons which should be clear to all, even if not the BoE," he asks.

Savouri observes the economy has a fundamentally healthy property market – both residential and commercial – and homeowners have never had as much equity in their homes.

This in addition to record high household savings.

"To the Bank of England and its economists, I say this. You have no idea what a real recession looks like and will be proven so wrong. Indeed, you will be so embarrassed by what you have been part of that choose to hide from your CV the fact you worked in Threadneedle Street over a period which will go down in history as its forecasting worst," he adds.