Pound Forecasts Soar as BOE’s Carney Signals Shift: Currencies
Strategists are raising their forecasts for the pound more than for any other currency versus the euro on speculation an improving U.K. economy is making the central bank more tolerant of a stronger exchange rate.
The median of more than 60 analyst estimates in a Bloomberg survey is for the pound to end the first quarter of 2014 at 83 pence per euro, 1.2 percent stronger than their outlook when Bank of England Governor Mark Carney started on July 1 and up from 85.73 today. That’s the biggest gain among 12 currencies tracked versus the euro.
Britain’s economy grew at the fastest pace in three years in the third quarter, causing traders to boost bets that the BOE will raise interest rates sooner than anticipated, even at the risk of letting the currency appreciate further. That would contrast with former Governor Mervyn King, who credited a weak pound with helping the U.K. avoid a deeper economic slump.
“As long as the economy continues improving, we’re unlikely to get any moaning about the strength of the pound,” Steve Barrow, the head of Group-of-10 research at Standard Bank Plc in London, said in an Oct. 25 phone interview. “When the economy was weak,” policy makers “including ex-Governor King, seemed to implore the markets to weaken the pound,” he said.
Barrow forecasts the pound will strengthen to 82 pence per euro in three months and to 80 pence by the end of April. Against the dollar, he sees it gaining to $1.71 and $1.69 in the same periods, from $1.6054 at 12:09 p.m. in New York.
Sterling jumped 3.1 percent against nine developed market peers in the past three months, the biggest advance in the group, Bloomberg Correlation-Weighted Currency Indexes show.
The pound has gained 2.5 percent from a five-month low of 87.69 pence per euro on Aug. 1, and has risen from a three-year low of $1.4814 on July 9, about a week after Carney took office.
Carney, the 48-year-old former governor of the Bank of Canada, pledged in August to keep the main interest rate at 0.5 percent at least until U.K. unemployment falls to 7 percent, subject to caveats on inflation and financial stability.
While policy makers projected that would occur at the end of 2016, the jobless rate declined to 7.7 percent in the three months through July, surprising economists in a Bloomberg survey who saw it staying unchanged at 7.8 percent.
Andrew Sentance, who until 2011 was a member of the BOE’s Monetary Policy Committee, told Bloomberg Television on Oct. 25 that policy makers may revise their forecasts to say unemployment will drop to the 7 percent threshold by late-2015. Officials should be preparing for a rate increase before then, to prevent a loss of “credibility” on inflation, he said.
Gross domestic product rose 0.8 percent in the third quarter, up from 0.7 percent growth from April to June and the most since 2010, a government report showed Oct. 25. That’s adding to signs that Britain’s slowest recovery in a century, in which it has recouped only two thirds of the output lost during the financial crisis, is starting to gather pace.
“With every release the U.K. credentials are reinforced, the economy is picking up, as seen in the GDP figures,” Neil Mellor, a foreign-exchange strategist at Bank of New York Mellon in London, said in a phone interview on Oct. 25. “There’s a probability that the BOE will have to rein in its forward guidance more quickly than many had expected. That would push sterling higher,” he said, forecasting $1.65 and 84 pence per euro by year-end.
Carney, who a day before the GDP report said there was “traction” in the economy, presents new quarterly forecasts on Nov. 13. Investors will be watching for any sign of a switch in focus from boosting growth back to controlling inflation, which has been above the BOE’s 2 percent target since 2009 and held at 2.7 percent last month.
“The rise in the sterling exchange rate would reduce the extent to which imported prices were squeezing households’ real incomes,” according to minutes of this month’s meeting of the BOE’s Monetary Policy Committee, published Oct. 23.
Analysts boosted their first-quarter estimates for the Swiss franc versus the euro by 0.8 percent since July 1 to 1.25, left the outlook for Poland’s zloty unchanged at 4.15 and revised down their forecasts for the 10 other currencies tracked versus Europe’s shared tender.
Sterling’s gains versus the dollar have been even greater than those against the euro, spurred by a plunge in the greenback on investor expectations for the Federal Reserve to keep printing money to buy bonds into 2014.
While analysts are struggling to keep pace with the pound’s jump versus the U.S. currency, seeing it ending this year at $1.58, that’s still a 5.3 percent improvement in outlook since July 1. That’s the biggest increase among 56 currency pairs in Bloomberg’s strategist surveys. By the end of the first quarter of 2014, they see sterling at $1.57.
The improvement in the U.K. economy is now priced into the pound and further strength will be limited, according to Ian Stannard, the head of European foreign-exchange strategy at Morgan Stanley in London.
The pound’s gains “fully reflect some of the more positive news we’ve had coming from the U.K., especially some of the positive data surprises,” Stannard said in an Oct. 25 interview with Bloomberg’s Niki O’Callaghan. “Much of that now is now fully priced-in, so I think it’s going to be difficult for sterling to maintain those gains.”
Morgan Stanley estimated Oct. 18 that the pound would appreciate to 81 pence euro and weaken to $1.57 by the end of the first quarter, according to Bloomberg analyst surveys.
The pound is down 16 percent versus its peers on a trade-weighted basis since the end of 2007, according to a BOE index. The gauge has slipped 23 percent to 81.88, from 106.46 in January 2007. The index measures sterling against currencies of the U.K.’s biggest trading partners.
King, who served for 10 years as BOE governor before Carney, said at a news conference in London on Feb. 16 that sterling’s depreciation in the financial crisis was necessary to “rebalance” the economy toward exports, and Britain would have had a “much deeper recession” without it. He told ITV News in March that policy makers weren’t trying to talk down the pound, while acknowledging that its slide helped exports.
U.K. growth will outpace that of the euro area by almost four percentage points through 2015, according to Bloomberg economist estimates, fueling the pound’s gains.
After expanding by 1.4 percent in 2013, Britain’s $2.4 trillion economy will grow 2.2 percent and 2.4 percent in the following two years, the surveys show. The euro area will shrink 0.3 percent this year before growing by 1 percent and 1.4 percent, according to economists.
“The outperformance of the U.K. economy against Europe will continue,” Alvin Tan, a London-based director of foreign-exchange strategy at Societe Generale SA, said in an Oct. 24 phone interview. The French lender estimates the pound will be at 81 pence per euro and $1.54 by March. “We expect sterling to outperform.”
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