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Pound Will Fall Versus Euro as U.K. Optimism Overdone, BNP Says

Investors should bet the pound will weaken against the euro as excessive optimism about the U.K. economy has pushed the U.K. currency above its fundamentals, according to BNP Paribas SA.

The pound will weaken to 87.10 pence per euro within two weeks as markets price in short-term market conditions, particularly interest-rate differentials, strategists at the company said. The pound rose to a six-week high against the euro on Aug. 15 after U.K. retail sales increased more than economists forecast, spurring bets that Bank of England governor Mark Carney will raise interest rates sooner rather than later.

“Investors have become too bullish on the pound,” Michael Sneyd, a currency strategist at BNP Paribas in London, said yesterday in a telephone interview. “We should see a catch-up in euro-sterling as the better growth data from the euro zone gets priced into the currency pair and Mark Carney reaffirms a dovish rhetoric to bring down U.K. yields.”

The pound appreciated 0.5 percent to 85.25 pence per euro at 4:46 p.m. London time after advancing to 85.05 pence on Aug. 15, the strongest level since July 3.

U.K. economic growth accelerated in the second quarter, jobless claims fell more in July as economists predicted and gauges of activity in construction, manufacturing and services all improved last month. U.K. government bonds have slumped in the past four months, with 10-year yields climbing to 2.70 percent from 1.69 percent at the end of April.

“The rally in sterling looks too aggressive relative to the rise in U.K. yields,” Sneyd said. “Investors have over-interpreted the implications the data will have on monetary policy.”

BNP Paribas predicts the pound will still strengthen to 84 pence per euro toward the middle of next year as the U.K. economy outperforms the euro area’s.

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