Interest rate hike prescriptions may be difficult to cure the pound's stubborn illness, investment banks expect the pound to look at 1.32 against the dollar

The power to bet that the pound will fall is increasing, as the market speculates that the Bank of England’s efforts to curb inflation will affect economic growth prospects and drag down consumer confidence. According to data from the Commodity Futures Trading Commission, speculators are increasing their shorts against the pound at the fastest rate in more than two years, further breaking the link between expected interest rate hikes and currency appreciation.

At the same time, strategists at CIBC, RBC Europe and Societe Generale expect the pound to fall to near its lowest level since the end of 2020 in the coming weeks and months. Mitsubishi UFJ Financial Group maintained its pound-to-dollar target at 1.32.

Two major risks in fundamentals put pressure on, the pound is expected to weaken further against the dollar

Foreign exchange analysts at Mitsubishi UFJ Financial Group (MUFG) pointed out that the yield on British government bonds has risen sharply in the past few weeks. The pound has strengthened against the euro and the yen, but the group pointed out that the pound's rise is not broadly based. Given the extent of the increase in yields, the pound's rise is relatively weak.

MUFG also expects the U.S. dollar to strengthen further. Analysts of the bank said: "We expect that as the U.S. dollar continues to strengthen more broadly, there will be a more sustained decline in the next few months. In this case, the pound is expected to further strengthen against the U.S. We weaken, we will maintain the 1.3200 target. "

MUFG pointed out that British government bond yields continued to rise, with the two-year government bond yield approaching 1.20% from a low of 0.50% in early August. Inflation expectations have also risen to levels before the financial crisis broke out in July 2008.

Rising energy prices have been a key factor in causing inflation concerns. Mitsubishi UFJ Financial Group pointed out that the change in the wording of the Bank of England (BoE) is also a key factor: "The UK’s rising inflation expectations and the Bank of England’s increasingly tough stance are the key drivers for the recent increase in the UK’s short- and long-term yields. ."

The prospect of the central bank's rate hike may not be able to withstand inflationary pressures, and the trend of the pound is showing signs of weakness

MUFG said: “The remarks of the Bank of England officials over the weekend provide a further strong signal that the Bank of England is close to raising interest rates. The upcoming meetings in November and December are very'active'.” The prospect of interest rate hikes has brought some support to the pound. However, MUFG pointed out that the pound's rise is based on a narrow basis and is concentrated against the euro, the yen and the New Zealand dollar. The pound has already suffered losses against other major currencies, falling more than 3% against Canadian and Norwegian currencies. Rising energy costs will weaken British consumer demand, and may also severely damage global risk appetite.

MUFG said: “The failure of the pound to strengthen under the support of the prospects for interest rate hikes in the UK may reflect to a certain extent that people are worried that inflationary pressures in the UK may be more troublesome than elsewhere and will erode the relative value of the pound. ” MUFG expects , As the Fed will announce its reduction in the size of its debt structure at its November policy meeting, the U.S. dollar will gain further gains. The group pointed out: "Before the end of the year, fundamental factors have already indicated that the dollar will strengthen."

However, the group also pointed out that the U.S. dollar has potential risks, especially if Fed Chairman Powell is not nominated for re-election due to regulatory considerations: " If Chairman Powell is replaced by a left-leaning candidate who is more pro-growth, the U.S. dollar may suffer. Blow. "

In the European market on Tuesday (October 12), the British pound oscillated within a narrow range against the US dollar, and the bulls have been unable to maintain the exchange rate above the 1.36 mark.


(Pound against the U.S. dollar daily chart)

GMT+8 15:50 on October 12, the pound against the US dollar reported 1.3596/98