Oct 4 2024: The British pound has seen a sharp decline, with Capital Daily analysts pointing to several factors, including the Bank of England’s (BoE) dovish monetary policy outlook, the currency’s strong valuation, and extended speculative positions.
Sterling dropped more than 1% against both the US dollar and the euro, marking one of its steepest daily falls against the dollar since the “Trussonomics” event two years ago, and its largest drop against the euro.
The pound’s weakness follows recent comments by BoE Governor Andrew Bailey, who hinted that the central bank may adopt a more aggressive approach to cutting interest rates. These remarks prompted investors to adjust their UK monetary policy expectations.
Despite this, the market reaction was somewhat surprising, as the revisions in rate forecasts were relatively modest. The UK’s 1- and 2-year Overnight Indexed Swap (OIS) rates fell only slightly compared to those in the US and the eurozone.
According to Capital Daily, the pound’s valuation has been relatively high, making it more vulnerable to shifts in market sentiment. Sterling has been the best-performing G10 currency this year, with its real effective exchange rate recently surpassing pre-Brexit referendum levels from 2016.
The sudden depreciation also reflects the unwinding of speculative positions, which had become overly extended. This unwinding has increased the currency’s susceptibility to market volatility.
Looking ahead, Capital Daily forecasts a continued decline for the pound, particularly against the euro. Analysts expect the BoE to implement deeper rate cuts than currently anticipated, and given the pound’s elevated valuation and ongoing speculative pressures, they predict the exchange rate to fall from the current 0.84 €/£ to 0.88 €/£ by the end of next year.