BNP Paribas Sticking to Its Guns Calls Pound's Weakness Overdone

  • Sterling weakness `considerably overdone': BNP Paribas
  • BOE to announce latest decision, release minutes on Thursday

In a month when banks reduced their sterling forecasts as the currency slipped to multi-year lows against the dollar, BNP Paribas SA continues to bet on its strength.

France’s biggest currency trader, according to Euromoney Institutional Investor Plc’s 2015 foreign-exchange survey, recommended staying bearish on the euro versus the pound and said that Britain’s currency is running out of catalysts to drive it any lower. BNP strategists forecast the pair to drop to 69 pence per euro by the end of the first quarter, which is eight percent lower than current levels.

Sterling was little changed versus the euro on Wednesday after touching its weakest level since February earlier this week. It held close to its lowest level against the dollar since June 2010.

The pound had a painful start to 2016 as the global outlook darkened with turmoil in China and plunging commodity prices. This has caused traders and analysts to delay their calls on when the Bank of England will lift interest rates from their record lows, further weighing on the currency. The central bank will announce its policy decision and release the minutes of its meeting on Thursday.

‘Very Dovish’

“Sterling weakness looks considerably overdone versus even already very dovish BOE expectations,” said Sam Lynton-Brown, a London-based foreign-exchange strategist at BNP Paribas SA. “Not only do we think that FX markets are pricing a too-dovish BOE rate-hike cycle but we think that even given that pricing, sterling should not be this weak.”

The pound was at 75.12 pence per euro as of 4:09 p.m. London time, having reached 75.55 pence on Jan. 11, its weakest since February. Sterling was little changed at $1.4455 after dropping on Tuesday to $1.4352, its lowest since June 2010.

Forward contracts based on the sterling overnight index average, or Sonia, aren’t pricing in a quarter-point increase until after February 2017, data compiled by Bloomberg show.

BOE officials will keep their key interest rate at 0.5 percent, where it’s been since March 2009, when they announce their decision on Thursday, according to all 45 economists surveyed by Bloomberg.

“We don’t actually need to see rate expectations move to see sterling strengthen,” Lynton-Brown said. “In euro-sterling, our preference is to sell any rallies into 75 pence. Even at the current levels we think it is far too high,” he said.

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