(Bloomberg) -- When the Bank of England’s first interest-rate cut since 2020 finally came on Thursday, it did little to deter traders from betting on further sterling strength.
Within minutes of the decision to ease policy from the highest level in 16 years, the UK currency started clawing back gains. Down 0.8% versus the dollar before the decision, it erased more than half that decline after the announcement, leaving it at the top of the pack this year among its Group-of-10 peers.
Currency strategists largely shrugged off Thursday’s decision to cut, which was far from unanimous and offered no guidance on the speed of any future reductions. Any slip in the pound is an attractive opportunity to buy more, according to Rabobank. State Street Global Markets suggested any weakness would be limited. Barclays said it’s the UK’s economic trajectory that’s key — not the decision to start easing.
Sterling’s outlook is “more about the bigger picture around the UK outlook, the fiscal trajectory and the relationship with Europe,” said Mimi Rushton global head of currency distribution at Barclays. “Those are more important factors than the Bank of England’s specific decision this week.”
Positive sentiment has built around the currency since Labour’s election victory last month. The prospect of a less-fraught political landscape prompted hedge funds to raise their bets for pound strength to their highest in a decade ahead of the meeting, while banks including JPMorgan Chase & Co and Goldman Sachs Group Inc stuck with their bullish predictions.
On Thursday, currency investors took comfort from the bank’s lack of guidance on additional reductions to the key rate.
“It remains to be seen whether more will, in fact be delivered later in the year,” said Andy Cossor chief market strategist at DZ Bank AG. The new government’s first budget could be “mildly expansionary,” he said — potentially another reassurance for sterling bulls.
If more cuts are coming, the BOE will likely act in lock-step or at a slightly slower pace than its other major peers, preserving the appeal of comparatively higher interest rates on pound-denominated assets. Thursday’s move comes after after cuts by the European Central Bank and the Swiss National Bank.
Yield Advantage
“Assuming the BOE reduces rates at a pace of around 25 basis points a quarter, and not more aggressively than the ECB, we continue to expect sterling to push higher,” said Jane Foley, head of currency strategy at Rabobank, who sees the euro weaker by more than 1% at 0.83 versus the pound on a six-month view.
“Sterling still enjoys a yield advantage against most G-10 currencies,” said Tim Graf, head of macro strategy for EMEA at State Street Global Markets. “We would expect any follow-on weakness in sterling to be limited.”
Still, not all market participants are as convinced the BOE will proceed with easing policy so gradually.
“The Bank of England’s rate cut should not be taken lightly, in the context of how crowded long-pound carry trades are,” said Paul Mackel, global head of currency research at HSBC, who said he anticipates sterling weakness.
For now, Labour’s arrival, and hopes for economic recovery as well as better trade ties with the European Union, are even swaying long-term bears.
Loomis Sayles is mulling a possible entry point after being underweight or neutral since 2015. Amundi SA said the BOE’s easing cycle would be “a good opportunity” for Europe’s biggest asset manager to increase its overweight position.
(Adds HSBC comment in 12th paragraph)
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