Capital Daily Sees Further GBP Decline Amid BoE Policy Stance By Investing.com

On Thursday, the pound saw a significant drop, which Capital Daily analysts attributed to a combination of factors, including the Bank of England’s (BoE) accommodative monetary policy outlook, the currency’s high valuation and widening speculative positions.

Sterling’s drop of more than 1% against the US dollar and the euro marks one of the sharpest daily falls against the greenback since the Trusonomics event two years ago and is the biggest against the euro.

The currency’s weakness is a reaction to recent remarks by BoE Governor Andrew Bailey, who suggested the central bank may become “a bit more aggressive” in cutting interest rates. This led investors to adjust their expectations of UK monetary policy.

Despite this, the reaction in FX markets was somewhat unexpected as the adjustments to rate expectations were not as significant, with only a slight fall in UK 1 and 2 year Overnight Indexed Swap (OIS) rates compared with those of Great Britain. the US and the Eurozone.

Analysts at Capital Daily note that sterling’s valuation has been relatively high, with sterling being the best performing G10 currency this year. The real effective exchange rate recently surpassed its level just before the 2016 Brexit referendum, indicating a strong valuation that may have contributed to the currency’s vulnerability.

The sharp depreciation of the pound also seems to reflect a unwinding of speculative bets, which had become excessively extensive. This recovery has made the currency more susceptible to changes in market sentiment.

Looking ahead, Capital Daily forecasts a further fall in the value of the pound, particularly against the euro. Analysts expect the BoE to adopt deeper rate cuts than currently anticipated and, given the high valuation of the pound and continued speculative pressure, they foresee a depreciation from the current rate of 0.84/€ to 0.88 /€ until the end of next year.

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