On Thursday, the British pound saw a significant decline, which Capital Daily analysts attributed to a combination of factors, including the Bank of England’s (BoE) dovish monetary policy outlook, the currency’s high valuation and extensive speculative positions.
The pound’s fall of over 1% against both the US dollar and the euro marks one of the steepest daily falls against the dollar since the Trussonomics event two years ago, and is the largest against the euro.
The currency’s weakness is a response to recent dovish statements from BoE Governor Andrew Bailey, which suggested the central bank could become “a little more aggressive” in cutting interest rates. This has led investors to revise their expectations for UK monetary policy.
Nevertheless, the reaction in foreign exchange markets was somewhat unexpected as adjustments in interest rate expectations were not as large, with only a slight decline in 1- and 2-year Overnight Indexed Swap (OIS) rates in Britain compared to those in the US and the Eurozone.
Analysts at Capital Daily note that the pound’s valuation has been relatively high, with the British pound being the best performing G10 currency this year. The real effective exchange rate recently surpassed the level just before the Brexit referendum in 2016, indicating strong appreciation that may have contributed to the currency’s vulnerability.
The sudden depreciation of the pound also appears to reflect a winding down of speculative betting, which had become too extensive. This settlement has made the currency more sensitive to changes in market sentiment.
Looking ahead, Capital Daily predicts a further decline in the value of the pound, especially against the euro. The analysts expect the BoE to make deeper rate cuts than currently expected, and given the high valuation of the pound and continued speculative pressures, they predict a depreciation from the current rate of 0.84/€ to 0.88/€ by the end of next year.
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