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Pound Forecasters Catch Up After Missing Biggest Jump Since 2009

Updated on
  • Banks including HSBC, Goldman Sachs revise forecasts upwards
  • RBC ‘surprised’ by BOE’s response to narrow inflation pickup

After missing the pound’s biggest rally in eight years, currency analysts are racing to catch up.

Strategists at banks including Goldman Sachs Group Inc. and HSBC Holdings Plc are revising estimates for sterling after the Bank of England surprised markets by signaling it will look to withdraw stimulus in coming months. The pound gained almost 3 percent in its best week since 2009 and held above $1.35 on Tuesday, while the year-end median forecast lagged behind at $1.29.

MUFG, Nomura International and Banco Bilbao Vizcaya Argentaria SA also revised their outlook for the pound following the central bank’s statement last week, while Morgan Stanley said it would likely adjust its forecasts. Goldman Sachs lifted its 12-month sterling call to $1.25 from $1.20 as it said “there is still room to fully price in a November hike.”

Updates from more banks are likely to follow, with both RBC Capital Markets and JPMorgan Chase & Co. bringing forward their estimate of a rate hike to November this year, in line with money-market pricing.

“We have been surprised by the extent to which the BOE feels the need to respond to a very narrow pickup in inflation,” said RBC strategist Adam Cole, adding the bank won’t issue new forecasts until its next monthly note. “It will not be clear for some time whether that is the right policy response or a mistake.”

BOE Impetus

The market now prices a 73 percent chance of a rate hike in November, with two increases fully priced in by November 2018. The BOE appears willing to look past sluggish wage growth and respond to above-target inflation by reversing stimulus put in place after last year’s Brexit vote.

“The Bank of England’s unexpected hunger to join other Group-of-10 central banks in the race to the exit from accommodative monetary policy has given additional impetus to sterling,” said HSBC strategist David Bloom in a note, with the bank expecting two rate increases by May and revising its end-2017 forecast to $1.35 from $1.20.

Markets have overreacted to the BOE’s shift, according to Nathan Thooft of Manulife Asset Management.

Source: Bloomberg

MUFG, which raised its estimates on Thursday, saw sterling ending 2017 at $1.33, from $1.29 previously. The pound-dollar pair could also benefit from the Federal Reserve being “viewed as less likely to follow through with a final rate hike this year,” said analyst Lee Hardman in a note.

Brexit Risks

Nomura, which was among the most bullish forecasters at $1.37 before the BOE meet, has priced in two rate hikes by May and now expects sterling to end the year at $1.40. There are still risks to this view, said strategist Jordan Rochester. If economic data suddenly weaken considerably, the Brexit negotiations go badly or if U.K. Prime Minister Theresa May’s speech on Sept. 22 in Florence is “more of the same and she doesn’t announce a transitional deal,” sterling would suffer, Rochester said.

BBVA, which revised its year-end forecast to $1.30 from $1.26, saw a risk investors would be disappointed after the BOE stoked expectations.

“If the Bank of England disappoints in November, the market will have to postpone the first rate hike by a further month,” said strategist Alexandre Dolci. “Sterling is likely to reverse part of the rally it has made in the past week.”

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