Sterling Wobbles as Market Bets on Aggressive BOE Rate Cuts

Investors are piling on bearish bets against the British pound after the Bank of England's (BOE) latest policy decision confirmed fears of faltering UK growth.

Reduced Pound Positions

Pictet Asset Management has significantly pared back its pound holdings since the beginning of the year. Hartford Funds and Russell Investments have made similar reductions, while RBC BlueBay Asset Management anticipates adding to its underweight stance as the market prices in multiple interest rate cuts from the BOE this year.

Sterling's Slide

Sterling dipped by as much as 1.2% following Thursday's decision, making it the laggard of the Group-of-10 currencies year-to-date, despite a slight recovery to around $1.2450 by week's end.

Growth Concerns

The BOE's decision was expected, but it halved its growth forecast while two board members voted for aggressive rate cuts, underscoring investors' concerns about the UK economic outlook.

Fiscal Pressure

The BOE's latest repricing highlights the urgency for Chancellor Rachel Reeves to deliver on her promise to boost economic growth. It also challenges the recent narrative that UK rates would remain elevated compared to other G10 countries.

Aggressive Rate Cuts

Market expectations now point to two more rate cuts this year, with a third becoming increasingly likely. Since early January, when traders anticipated only two cuts by 2025, the likelihood of BOE easing has surged. UBS predicts an additional five cuts by year-end.

Currency Weakness

Continued easing will lead to further currency weakness, with ING forecasting a drop to $1.19 later this year, a level last seen in March 2023. BBVA expects a hit against the euro, which could climb to 0.85.

Yen Divergence

Nomura Holdings predicts a 5% decline in sterling against the yen to around 180 yen by April due to the divergence in interest rates, with Japan tightening.

Conclusion

The BOE's split vote and concerns over stagflation are weighing heavily on the pound. Investors are betting on multiple rate cuts, which will likely translate into continued currency depreciation.