Pound’s Slump Belies Strength No Other Can Match

The pound, languishing at an 11-month low against the dollar, is far from dead.

That’s the message from options traders and strategists, who expect sterling to be one of the developed world’s two best performers in the year ahead versus the greenback. The pound has already rallied against 30 of its 31 most-traded peers in the past month, underscoring the strength of Britain’s economy.

“I don’t think we’re dealing with sterling being an unpopular currency, we’ve just been in a market with a lot of dollar buying,” Stuart Bennett, head of Group of 10 currency strategy at Banco Santander SA in London, said yesterday by phone. “If you look at sterling against the rest of the world, it’s performing quite well. We’re still sterling-bullish.”

The U.K.’s gross domestic product will expand a total of 5.6 percent this year and next, compared with 3.9 percent for the G-10, based on economist forecasts compiled by Bloomberg. The growth outlook may help persuade Bank of England policy makers it will soon be time to begin raising interest rates, which they kept at a record-low 0.5 percent today.

Bennett said he sees the pound gaining almost 4 percent to $1.68 and 76 pence per euro by the third quarter of 2015, compared with earlier forecasts of $1.75 and 73 pence.

Dollar Surge

Since reaching a six-year high of $1.7192 on July 15, the pound has tumbled almost 6 percent against the U.S. currency, to $1.6213 as of 12:05 p.m. in London. It touched a low for this year of $1.5944 on Oct. 6.

Sterling fell as parts of Britain’s economy, including industrial production and retail sales, slowed. That, in turn, prompted futures traders to push back the likely timing of the BOE’s first rate increase since 2007, just as speculation grew for an early boost to the U.S. federal funds rate.

While the pound is down 2.1 percent against the dollar this year, it has risen against all 31 of its most-traded peers except the Hungarian forint in the past month. The gains range from a 0.6 percent advance against China’s yuan to a 7.7 percent surge versus Russia’s ruble.

The pound has also benefited as the euro weakened on the European Central Bank’s rate cuts and expansion of the money supply. Sterling is up 5.5 percent versus the 18-nation currency this year, to 78.73 pence per euro, heading for its best annual performance since 2009.

Policy Divergences

“The case for renewed outperformance of the pound versus the European currencies -- the euro and Swiss franc, in particular -- remains a compelling one,” Bank of America Corp. analysts including currency strategist Kamal Sharma in London, wrote in an Oct. 7 client note. “The policy divergences between the BOE and its European counterparts continue to widen.”

Bank of America sees the pound rising versus the dollar and euro by year-end, predicting levels of $1.62 and 77 pence.

Options traders expect the pound to post the second-best performance against the greenback of its G-10 peers during the next year, with only the yen seen doing better.

Strategists surveyed by Bloomberg are more optimistic. While currencies such as the franc, yen and euro are seen tumbling more than 3 percent by the third quarter, the pound is forecast to drop less than 1 percent in the group’s best performance.

‘Hawkish BOE’

The one currency it can’t surmount is the dollar. There’s a 57 percent likelihood the U.S. will raise its target rate from a range of zero to 0.25 percent to at least 0.5 percent by September 2015, futures data compiled by Bloomberg show.

That’s down from 68 percent before the minutes from the Federal Reserve’s Sept. 16-17 meeting showed yesterday that officials are concerned a global slowdown and a stronger currency pose risks to the U.S. economy. The dollar dropped versus the pound and most of its 31 main peers after the release.

In the U.K., forward contracts based on the sterling overnight interbank average, or Sonia, suggest a quarter-percentage point increase in the main rate in August, back from the February boost anticipated two months ago.

Hedge funds and other large speculators turned bullish on the pound last week for the first time since Scotland voted Sept. 18 to stay within the U.K. Net bets on a sterling gain were 3,589 contracts in the week ended Oct. 3, though still down from a 6 1/2-year high of 56,412 on July 4, according to the Commodity Futures Trading Commission in Washington.

Swissquote Bank SA in Gland, Switzerland, sees the pound appreciating to 69 pence per euro by next September. That makes it the most optimistic of more than 40 forecasters surveyed by Bloomberg, whose median estimate is for a gain to 76 pence. Sterling will strengthen to $1.74, according to Swissquote, compared with a median prediction of $1.60.

“The BOE is going to get way ahead of the ECB,” Peter Rosenstreich, the chief foreign-exchange analyst at Swissquote said yesterday in an interview. “Sterling will begin benefiting from policy and growth divergence and a hawkish BOE.”

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