Sterling Faces Further Weakness as BOE Worries Intensify

Investors are positioning for a weaker British pound following the Bank of England's latest policy decision, which confirmed fears about slowing UK economic growth.

Pessimistic Market Sentiments

Asset management firms such as Pictet, Hartford Funds, and Russell Investments have reduced their exposure to the pound. RBC BlueBay Asset Management anticipates further underweighting, as the market prices in additional interest rate cuts from the BOE.

Sterling's Decline

Sterling fell 1.2% after Thursday's rate cut, making it the worst-performing currency in the Group-of-10 this year. Despite a slight recovery to $1.2450 by week's end, it remains under pressure.

BOE's Growth Forecast

The BOE halved its growth forecast in its latest projections, indicating concerns about the UK economy. Two board members voted for aggressive half-point rate cuts, fueling market pessimism.

Fiscal Challenges

The urgency for Chancellor Rachel Reeves to accelerate economic growth is highlighted by the market's reaction. The assumption of higher UK interest rates relative to other G10 countries, which had supported the pound in recent years, is now being challenged.

Aggressive Rate Cuts

Market expectations point to two more rate cuts in 2023, with a third increasingly likely. Projections now include five additional cuts this year, according to UBS.

Impact on Currency

UBS forecasts a fall to $1.19 later in the year. ING expects a decline against the euro to 0.85. Nomura sees a potential 5% depreciation against the yen by the end of April.

Stagflation Concerns

Governor Andrew Bailey's comments that the vote split is not a dovish sign failed to provide support for the pound. Investors fear the UK may experience stagflation, with elevated inflation and slowing growth.

Short-Term Outlook

The Hartford World Bond Fund has reduced its long position in the pound due to the weaker growth outlook and persistent inflation. BlueBay sees potential for further short bets if inflation triggers a surge in gilt yields.

Conclusion

Investor sentiment towards the pound remains bearish. The BOE's concerns about economic growth and the prospect of aggressive rate cuts are driving the currency's decline. The market is pricing in further weakness in the coming months.