Traders in London.
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LONDON – Events GBP is on a firmer footing since the appointment New Prime Minister Rishi Sunakbut Wall Street still sees more vulnerability over the next 12 months.
After falling a record low against the dollar below $1.04 On September 25th following disastrous fiscal policy announcements that would eventually lead to the resignation of former Prime Minister Liz Truss, the pound recovered to around $1.139 on Thursday morning, but still down more than 15% up to the present time.
Sunak’s planned return to a more traditional conservative fiscal policy agenda has stabilized markets and reduced expectations for a more aggressive rate hike by the Bank of England, providing time for the future. respite for currency.
In a Monday note, Deutsche Bank FX Vice President and Strategist Shreyas Gopal said the “crisis” chapter for the UK could now be over, with the pound now likely to be traded as a “normal” currency. but note that downward pressure from large external financing needs and low real exchange rates remain.
“The UK’s external funding demand remains strong and at current market prices, real yields are still too low relative to other major currencies. As long as the global risk environment remains weak, the This will leave the pound vulnerable and the trend is likely to be lower,” Gopal said.
The Bank of England is expected to raise interest rates by 75 basis points on Thursday, the biggest increase since 1989, but economists expect the central bank to adopt a dovish tone. and will ultimately fail to reach the market-priced closing rate of 5%.
“Overall, we remain bearish on the pound and believe GBP weakness will return for the rest of the year,” Gopal said.
“In the volatile space, the market has rightly judged that the pound has contracted, in line with our view and we take profits based on our short volatility recommendations from earlier this month. “
The UK’s long-term current account deficit is exacerbated by soaring energy prices, which have added nearly 2% of gross domestic product to the UK’s trade deficit over the past year, while also causing historical pressure on household incomes. UK real wages fell at a record pace in the second quarter and inflation hit a 40-year high of 10.1% in September.
Gopal suggested that as a result, private sector savings could fall further in the coming quarters to sustain consumption of essentials, while the government’s new fiscal plans, expected will be launched in full later this month, which will likely mean borrowing from the public sector. will put less downward pressure on the trade balance.
The government has also promised in more detail a more targeted version of the Energy Price Guarantee plan, which will reduce government spending but will further strengthen the UK’s recession potential.
“This will lead to import compression and a (cyclical) improvement in the current account balance – although as a share of GDP the effect is likely to be less pronounced,” said Gopal.
“Apart from this, two other spreads include the recent drop in gas prices, the further away from the peak, the better the gas price settles for outside accounts.”
While the recent news flow has been more positive for the UK current account, Deutsche Bank does not believe it will prevent the external deficit from growing “wider than usual and wider than in developed markets”. another development.”
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“Taking these things together, we are revising our forecast to be more positive, but still expect a more positive outlook,” said Kamakshya Trivedi, global head of FX and rate strategy at Goldman. the underperforming GBP numbers up front.”
Last week, Goldman raised its three, six and 12-month outlook for the British pound to $1.10, $1.11 and $1.22 from its previous prediction of $1.05. $1.08 and $1.19.
Not the last crisis for the UK
However, despite the persistent holes, analysts do not see a return to the record lows seen at the end of September. In a note on Tuesday, BMO Capital Markets suggested a less hawkish stance. from the Bank of England is unlikely to trigger a strong short-term sell-off in sterling, nor will a more restrictive stance create buying pressure.
“The UK economy and the GBP still have many macroeconomic and balance-of-payments (BoP) difficulties to face. However, one of the more attractive features of the UK’s macro picture remains. UK is about being the first to hit a crisis, and Stephen Gallo, head of European FX strategy at BMO, said.
On the longer-term view, however, Gallo said the Canadian investment bank is skeptical that 2022 will mark the final crisis for the UK, whether around currency, balance of payments or policy. fiscal.
He added: “We expect the UK’s overall risk-reward to be higher today than it was 10 years ago. However, the most drastic phase of the revaluation appears to be fading. gradually within the distance of the rearview mirror”.
