Pound Has Few Allies as Goldman, HSBC Unmoved by Hawkish BOE

Updated on
  • Sterling likely to slide to $1.20, say the two banks
  • ‘Market may be jumping the gun’ on BOE trajectory: UniCredit

Morgan Stanley’s Nell Says Brexit Is Starting to Bite

For all the sterling strength spurred by the Bank of England Governor Mark Carney’s recent hawkish comments, strategists aren’t rushing to raise their forecasts.

Goldman Sachs Group Inc. is sticking to its call for the pound to fall to $1.20 in the next 12 months, while HSBC Holdings Plc still sees a depreciation to reach that level by December. The median year-end forecast in a Bloomberg survey of economists is for $1.27, a 2 percent drop from current levels after the currency rallied that much last week.

“We continue to believe that pound is headed to $1.20 against the dollar and to parity against the euro by year-end,” HSBC analysts, including global head of currency strategy David Bloom, wrote in a recent note. “The last thing the U.K. needs in our view is an unnecessary rate rise being added to the already difficult economic and political outlook. ”

Investors now price a more than 65 percent probability of a BOE rate increase by the end of 2017, up from 7 percent before its June 15 meeting, based on overnight money market rates. The shift came after increasingly hawkish rhetoric from policy makers, culminating in Carney saying on Wednesday that “some removal of monetary policy is likely to become necessary.” The comments triggered sterling’s biggest jump against the dollar since April.

But with the June 8 election weakening the ruling Conservative Party’s position as formal negotiations to leave the European Union start, analysts remain skeptical on the pound’s longer-term outlook. Economic data has also been undercutting expectations, making the case for tighter policy debatable. 

Sterling fell for the first time in nine days against the dollar on Monday after IHS Markit’s Purchasing Managers Index showed manufacturing expanded at a slower pace than forecast, adding evidence that Brexit-related uncertainty is weighing on companies and households. The Bloomberg Brexit Barometer sank to its lowest level since the aftermath of last year’s EU referendum, reflecting the lack of policy clarity after June’s inconclusive general election.

Economic Slack

Goldman analysts, including Andrew Benito, said they hold a less hawkish view on monetary policy than the market is pricing as they foresee a slowdown in the U.K. economy and that “Brexit uncertainties will not be resolved quickly.”

They highlight that Carney reiterated the BOE must consider what he called the “output and inflation trade-off.” Goldman analysts say this means that the central bank’s ability to look through rising inflation requires “a further narrowing of the slack in the U.K. economy, which we do not expect.”

MUFG also hasn’t changed its forecast, though it does see the BOE giving sterling a filip. Recent developments “support our view that the hawkish shift from the BOE will provide more support for the pound in the near-term,” wrote Lee Hardman, a currency analyst at MUFG.

UniCredit SpA analysts including Marco Valli disagree with markets’ interpretation that recent developments may have raised the possibility of a softer Brexit or that the BOE is likely to hike soon. They maintain a bearish bias on sterling’s medium-term prospects, targeting $1.28 by end-2017, and see signs of a “persistent slowdown” for the economy.

“We think the market may be jumping the gun in the case of the Bank of England,” they said.

— With assistance by Stephen Spratt

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