Pound's Outlook Pits HSBC vs Deutsche Bank

  • German bank sees sterling dropping to $1.27 by year-end
  • HSBC says market too pessimistic, calls pound at $1.60

Europe’s biggest banks are laying out drastically different paths for the pound.

As sterling dropped this week to $1.4080 -- the weakest level since 2009 -- Europe’s largest lender HSBC Holdings Plc said the U.K. currency will climb to $1.60 by year-end. Meanwhile, the world’s second-biggest currency trader Deutsche Bank AG reiterated its bearish outlook, which calls for a decline to $1.27.

The disparity coincides with the U.K. facing a slew of challenges, from whipsawing financial markets around the globe and a vote on whether to remain a European Union member, to inflation that’s close to zero, damping the outlook for interest rates. While Bank of England Governor Mark Carney on Jan. 19 signaled that a boost to U.K. rates is still some way off, HSBC says the market has become too pessimistic.

“We continue to expect a rate rise sooner than the market expects and that continues to support a view of sterling higher,” said Daragh Maher, head of U.S. currency strategy for HSBC in New York. “Ultimately we will be driven by Brexit and rate expectations in the U.K. But for now, the fixation is other factors” such as falling oil prices and stocks.

The pound rose 0.4 percent in the week to $1.4308 as of the 5 p.m. London close Friday, halting a three-week run of declines that was the longest since July. It slid as low as $1.4080 on Jan. 21, the lowest since March 2009. Sterling gained 1.3 percent to 75.56 pence per euro.

JPMorgan, ING Bank

HSBC boosted its forecast for the beleaguered currency from $1.50 even as peers including JPMorgan Chase & Co., ING Bank NV and Credit Suisse Group AG have cut their estimates in recent weeks.

Forward contracts based on the sterling overnight index average, or Sonia, show traders aren’t fully pricing in a quarter-point increase to the U.K.’s 0.5 percent main rate until after March 2017. Carney is scheduled to speak before lawmakers on Jan. 26.

A report next week will show gross domestic product rose 0.5 percent in the fourth quarter, from 0.4 percent in the three months through September, according to the median forecast of economists surveyed by Bloomberg. A Nationwide gauge of house prices gained 0.6 percent this month, a separate survey predicts.

U.K. government bonds declined for the first time in three weeks, with the 10-year yield rising five basis points, or 0.05 percentage point, to 1.71 percent. The 2 percent gilt due in September 2025 fell 0.44, or 4.40 pounds per 1,000-pound face amount, to 102.555.

Britain saw the lowest demand for gilts in almost seven years when it sold January 2021 securities on Jan. 20. Investors bid for 1.07 times the bonds sold, the lowest bid-to-cover ratio since a 2009 sale of 40-year debt that failed to attract enough bids to reach its target.

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