Pound Election Boost Seen Fleeting as Rally Fades Near $1.30

  • Sterling to fall versus all G-10 peers in rest of 2017: survey
  • Failure to break $1.30 owing to lack of conviction: Nomura AM

The pound’s election-driven rally may lose steam, with analysts predicting its losses from here until the end of the year will be the biggest among Group-of-10 peers.

The currency will decline about 3.5 percent against the dollar by the end of this year, according to strategist forecasts compiled by Bloomberg, a bigger drop than predicted for any of its G-10 counterparts. While the U.K.’s Brexit vote made sterling 2016’s biggest loser, such a slide would be a marked reversal of fortunes for a currency that’s stayed close to the top of the leader board this year -- capped by a 3 percent appreciation since Prime Minister Theresa May’s call for a snap election.

Even a relatively hawkish Bank of England and inflation hitting a four-year high have failed to push the pound beyond $1.30, a level which the currency has tested on multiple occasions this month. It proved elusive again on Wednesday, even as the latest political firestorm in Washington spurred across-the-board losses for the dollar.

“The moment of outperformance for the pound for now is over in our view,” said Ned Rumpeltin, European head of currency strategy at Toronto-Dominion Bank in London. “The political cycle is almost complete, once the election is behind us, that’s over. It’s going to be hard to find a lot of strong positives for sterling to rally on the back of that.”

Rumpeltin’s year-end forecast is $1.27, but he didn’t rule out the possibility of a $1.22-23 level over the next few months. The median forecast in Bloomberg’s survey is for the currency to end the year at $1.25. Even after rallying 5 percent in 2017, sterling remains about 13 percent weaker since the Brexit vote last June.

“The narrative that calling a snap election in the U.K. puts the government in a stronger negotiating position with its EU counterparts, we don’t buy that,” Rumpeltin said, adding that “we are long euro-sterling, we are short cable.”

The economic picture is also souring. Citigroup Inc.’s Economic Surprise Index for the U.K. dropped to its lowest level since June last year on May 15. Even banks, such as JPMorgan Chase & Co., which have raised their pound projections this year, have cautioned that it was unlikely to be a sustained recovery.

The currency was at $1.2954 as of 7:17 a.m. on Thursday, after climbing to as high as $1.2991 the previous day. The currency hasn’t breached $1.30 since September.

“People have been occasionally looking at the pound breaking $1.30 and it gets up to these levels and it seems there is little conviction for things to break through the next level,” said Richard Hodges, London-based head of unconstrained fixed-income at Nomura Asset Management, which oversees $377 billion. “We need more conviction.”

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE