- Analysts forecast sterling resurgence starting in 2017
- Weaker pound is good for U.K. outlook: Eurizon’s Jen
Mark Carney’s stimulus package dealt the pound more of a glancing blow than a knockout punch.
While sterling has tumbled versus the dollar since the Bank of England governor announced a suite of measures to support the U.K. economy, the currency only fell to levels seen three weeks ago. It’s still about 2 percent higher than the 31-year low reached in the aftermath of Britain’s vote to exit the European Union in June.
Currency investors are considering the trade-off between stimulus measures that tend to weigh on a currency, and the potential for a rebound should they prove successful. The drop in the pound itself gives the economy another fillip by boosting exports. Options-market gauges show investors are gradually becoming less bearish on sterling’s longer-term prospects, and analysts are forecasting a bounceback in the currency in 2017.
“The pound may be falling, but that’s not necessarily bad news,” said Stephen Jen, the chief executive officer at Eurizon SLJ Capital Ltd. in London, and a former economist at the International Monetary Fund. “A weaker pound is mostly likely to be part of the intention of the policy. It should support growth and restore balance in the economy, which in the longer term is good news for the economy and the pound.”
The pound plunged 1.6 percent on Thursday after the decision. The level remained well above the 31-year low of $1.2798 set July 6.
Sterling rebounded by as much as 0.5 percent on Friday before reversing gains after U.S. jobs data came in stronger than analysts envisaged and pushed the dollar higher against all Group-of-10 currencies. The pound was 0.5 percent lower at $1.3039 as of 3:05 p.m. in London.
The BOE cut interest rates to a record-low 0.25 percent and announced policies which will expand its balance sheet by as much as 170 billion pounds. The measures were designed to counter the fallout of the U.K.’s decision to leave the EU, which has pushed the pound down by about 12 percent, and already led to a contraction in manufacturing and services.
Having a floating currency helps soften the impact of a downturn, BOE Deputy Governor Ben Broadbent said in BBC Radio interview Friday.
While analysts are predicting further losses in the pound this year, the longer-term outlook is rosier.
Sterling will fall to $1.27 by the end of 2016, before rising to $1.33 next year and $1.39 in 2018, according to median forecasts of analysts in Bloomberg surveys.
That tallies with movements in the derivatives market, where the premium for 12-month options granting the right to sell the pound over that for buying is close to an eight-month low at 1.61 percentage points. Six-month implied volatility for the pound against the dollar has dropped to 9.73 percent, the lowest since February.
That the BOE was “more aggressive than most expected is pound-negative, but I think after an initial selloff we should stabilize fairly quickly as we go back to watching the incoming data,” said Adam Cole, head of global foreign exchange strategy at Royal Bank of Canada in London.
There may be additional reasons for sterling’s resilience.
Speculation that the BOE would ease policy after Brexit prompted investors to run the biggest short positions, or bets on the currency’s decline, since records began, data published last week by the U.S. Commodity Futures Trading Commission showed. That extreme market positioning could work in favor of the pound as it limits the potential for further selling.
The currency’s selloff was also contained after Carney said that while its benchmark rate may fall further, the BOE is “very clear” that it will stay above zero. Central banks in Europe and Japan have cut interest rates below zero in order to boost their economies.
For Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA in London, that reassurance, and the fact that the central bank expanded the bond-purchase program, means the pound is unlikely to face precipitous losses.
“The statement is seemingly ruling out negative rates for now making excessive sterling weakness less likely,” said Marinov. “I would also think that quantitative easing could attract inflows into the U.K. stocks and property markets, some of this from outside the U.K. That could help the currency.”