The world’s biggest currency trader said the best days for the pound may be behind it as the Bank of England can no longer provide positive surprises and investors shift their focus to the downside risks.
Citigroup Inc. lowered its forecasts for sterling’s gains versus the dollar as the currency dropped to the lowest level in seven weeks today. The pound, the best-performing major currency of the past year, will struggle to appreciate further because the market has priced in monetary policy from the BOE, while the Federal Reserve may remove stimulus sooner than traders expect, said Valentin Marinov, head of European Group-of-10 currency strategy. U.K. government bonds declined.
“It seems like the market is already expecting a considerable tightening from the Bank of England,” Marinov said in an interview from London. “The scope for positive pound surprises coming from the BOE may be less pronounced than it was in the past. Investors are also starting to pay greater attention to the downside risks for the pound.”
These risks include the Scottish vote for independence on Sept. 18 and the debate around the role of the U.K. in a more integrated European Union, opening up the possibility of Britain leaving the union.
The pound fell 0.2 percent to $1.6908 as of 4:16 p.m. London time and earlier was as low as 1.6890, its weakest since June 12. Sterling was little changed at 79.16 pence per euro.
Citi forecasts the pound to strengthen to $1.71 by the end of September and $1.72 by year-end. Last month, it predicted the pound would gain to $1.76 and $1.77, respectively, according to data collected by Bloomberg. The forecast was updated on July 28.
The median forecast was for the pound to rise to $1.71 by the end of September and fall to $1.70 by year-end, according to contributions from 82 analysts compiled by Bloomberg.
The pound has gained 12 percent in the past year, making it the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, as improving economic data boosted expectations the central bank will increase borrowing costs. The euro rose 0.5 percent, while the dollar lost 0.4 percent.
Forward contracts based on the sterling overnight interbank average, or Sonia, show investors are betting U.K. borrowing costs will increase 25 basis points by February. The central bank has kept interest rates at a record-low 0.5 percent since 2009.
Traders only see about a 23 percent chance the central bank will raise the target for its benchmark to at least 0.5 percent by March even after Fed Bank of Dallas President Richard Fisher said in a speech this month that the Fed should raise borrowing costs “early next year, or potentially sooner depending on the pace of economic improvement.” The Fed will keep its target for overnight bank lending in a range of zero to 0.25 percent at the end of its two-day meeting today, based on a Bloomberg News survey of economists.
The divergence in rate expectations between the U.K. and U.S. is “changing the outlook for cable,” Marinov said referring to the pound-dollar exchange rate.
“The pound will still be one of the best-performing European currencies but in terms of relative risks, the highs for cable may be behind us,” he said. “It may be prudent to sell cable at current levels.”
U.K. government bonds declined with Treasuries after data showed the U.S. economy grew faster than analysts forecast in the second quarter.
The yield on benchmark 10-year gilts was rose four basis points, or 0.04 percentage point, to 2.58 percent. The rate dropped as low as to 2.53 percent yesterday, the lowest since May 29. The 2.25 percent bond maturing in September 2023 fell 0.28, or 2.80 pounds per 1,000-pound face amount to 97.325.
Ten-year Treasury yields climbed six basis points to 2.53 percent.
Gilts returned 4.9 percent this year through yesterday, Bloomberg World Bond Indexes show. That compares with a 5.8 percent gain for German securities and 3.6 percent for Treasuries.
To contact the reporter on this story: Eshe Nelson in London at email@example.com