The British pound’s current scenario appears bleak, as various financial institutions contemplate increasing their short positions on the currencyThe recent moves made by the Bank of England have heightened fears regarding the sluggish growth of the UK economy, prompting investors to prepare for a further decline in the pound's value.

This financial unease has not gone unnoticedSince the beginning of the year, firms like Bidstack Capital Management have considerably reduced their bets on the pound, a trend echoed by Hartford Funds and Russell InvestmentsRoyal Bank of Canada’s BlueBay Asset Management suggests that there remains the potential for increased short positions in the pound, especially with the market anticipating further interest rate cuts from the Bank of England this year.

Following the decision to cut interest rates by 25 basis points last Thursday, the pound plunged by 1.2%, marking it as the worst-performing currency among the G10 for the year, despite a slight recovery after this initial drop.

The pound has struggled this year, with economic forecasts failing to instill much confidence among tradersAlthough this recent interest rate cut was not entirely unexpected, the Bank of England’s reassessment of its economic prognosis—a halving of growth expectations—has increased the concernsTwo voting members even advocated for a more aggressive cut of 50 basis points, startling many in the financial community.

Shaniel Ramjee, a portfolio manager at Bidstack, expressed skepticism about the pound's futureHe noted, “Given the current state of UK fiscal health and economic performance, it’s hard to envision a market demand for the poundWe still view the UK economy as facing risks that necessitate further rate cuts.” Since January, he has curtailed his exposure to the pound to the minimal required levels in his portfolio.

Recent adjustments in pricing vividly illustrate the urgency for Chancellor Reeves to fulfill promises aimed at accelerating economic growth

Advertisements

This moves against the backdrop of the arguments that supported the pound’s rise over the past two years, namely, the notion that UK interest rates would remain significantly higher than many other G10 nations.

Looking ahead, the Bank of England’s aggressive rate-cutting approach seems increasingly likely, which undermines the pound's long-standing position as a high-yield currencyThis also stifles expectations that the UK could evade the stringent trading tariffs imposed by the US.

Expectations within UK financial markets have shifted dramaticallyA clear pricing mechanism shows that there are likely two more rate cuts this year, with the increasing possibility of three additional cutsTraders’ earlier predictions from January envisaged only two rate cuts by the Bank of England in 2025. However, this outlook has undergone substantial revision, with the reputable financial institution UBS boldly projecting up to five rate cuts by the end of this year.

Such a drastic shift in expectations indicates a profound reassessment of the outlook for the UK economy and its monetary policy, heralding a new landscape for the UK financial markets.

Further easing of monetary policy is expected to lead to an even weaker poundING forecasts that the pound-to-dollar exchange rate could sink to 1.19 later this year, hitting the lowest point since March 2023. BBVA anticipates a drop in the pound against the euro, with euro-to-pound parity potentially rising to 0.85. Nomura believes that the differing trends in interest rates, with UK rates falling and Japanese rates tightening, could lead to a 5% decline in the pound compared to the yen by the end of April.

In a report, Nomura's currency strategist Dominic Bunning stated that the latest voting outcomes “could continue to pressure short-term UK government bond yields and intensify downward pressure on the pound.”

Even comments from the Bank of England Governor Andrew Bailey, who asserted that the voting changes didn’t signal a dovish shift, barely managed to lend support to the pound

Advertisements

Advertisements

Advertisements

Advertisements