Goldman Fund Manager Says Pound to Climb With Market Too Dovish

  • Signs of wage inflation emerging in U.K., Moffitt says
  • BOE's Forbes says rates should rise `sooner rather than later'

Goldman Sachs Asset Management says the pound is set to strengthen against the dollar as the Bank of England will probably raise interest rates sooner than the market predicts.

The pound has fallen about 3 percent from this year’s high versus the greenback as markets have pushed back estimates to beyond December 2016 for when the U.K. central bank will act. Goldman Sachs Asset Management predicts the BOE will probably increase rates in the first quarter and the market is “now properly underestimating that risk,” said Philip Moffitt, Asia-Pacific head of fixed income at the firm in Sydney.

U.K. data this month have shown the jobless rate unexpectedly dropped to the lowest level since 2008 and wage growth, excluding bonuses, was near the highest in six years. Higher interest rates are positive for currencies as they provide a greater return for investments.

“When we look at all the major economies, the U.K. seems to be the one where the labor market tightening up actually seems to be generating some signs of wage inflation,” said Moffitt, whose firm oversees or advises on more than $1 trillion. “We’ve had a view for quite a while that the Bank of England would be moving early next year, and they’ve not said anything for us to change our view.”

The pound has fallen from this year’s high of $1.5930 set on June 18. It was at $1.5466 as of 4:45 p.m. in London on Monday.

Sterling has weakened against 14 of its 16 major counterparts since the Federal Reserve’s Sept. 17 decision to keep its own benchmark rate on hold. The Fed cited increased global risks in its policy statement, fueling speculation the same reasons will restrain the U.K. central bank. The pound is little changed against the greenback since then.

Bank of England policy maker Kristin Forbes said last week the next move in U.K. interest rates will be higher and it should happen “sooner rather than later.” The nation’s economic prospects can survive the current difficulties in emerging markets, and domestically led growth “shows all signs of continuing, even if at a more moderate pace,” she said in a speech on Friday.

Forbes’s confidence isn’t reflected in markets, with forward contracts based on the sterling overnight index average, or Sonia, suggesting a full 25 basis-point increase in the BOE’s key rate won’t happen until later than December 2016. The central bank has kept its benchmark at a record-low 0.5 percent since March 2009.

Improvement Signs

The U.K. jobless rate dropped to 5.4 percent between June and August, the lowest since June 2008, the Office for National Statistics said Oct. 14. Pay growth excluding bonuses slowed to 2.8 percent from 2.9 percent in the three months though July, which was the highest since February 2009.

With the Fed priced to increase rates in about seven months and the BOE estimated to wait at least 15, the difference between expectations may now be too great, Aurelija Augulyte, a senior foreign-exchange strategist at Nordea Markets in Copenhagen, wrote in a research note dated Oct. 18.

“The U.K. labor market is by most measures in a better shape,” she wrote. “If we are going to see any central bank raise rates, the markets have all reason to call for the BOE.” Augulyte said she prefers the pound to the dollar, or even the euro.

Bearish Bets

Traders have yet to be convinced. 

Hedge funds and other money managers increased net bearish bets on the pound to 7,527 contracts in the week through Oct. 13, from 4,533 the previous week, according to the Commodity Futures Trading Commission in Washington. Similar bets declined for every other major currency including the euro, yen and Australian dollar during the period, the data showed.

At Goldman Sachs Asset Management, Moffitt believes the pound is due to strengthen.

“You’ve had quite extreme moves to levels that now look to us to be a bit cheap,” he said. When you couple that with positioning, a change in Fed rhetoric and market pricing for tightening “we’ve shifted the portfolio a little bit,” he said.

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