Traders anticipate further gains for pound

The pound remained near a 15-month peak on Monday, with traders anticipating further gains on the back of tighter policy from the Bank of England.

A major shake-out of bearish bets against the pound and a big rise in gilt yields following a more hawkish central bank, has also convinced some strategists to reverse their outlooks for the currency.

HSBC conceded "defeat" on its call for a drop in the pound to $1.20, saying on Monday that the currency "has happily ignored the political intrigue of Brexit throughout 2017".

David Bloom, an HSBC strategist, said he now forecasts that sterling will end the year at $1.35, up markedly from a previous forecast of $1.20.

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“The Bank of England’s unexpected hunger to join other G10 central banks in the race to the exit from accommodative monetary policy has given additional impetus to [the pound],” he said, adding that “we were wrong”.

Sterling jumped last week to $1.36 after the BoE primed investors for a more hawkish policy stance, and after one of the central bank’s leading doves made similar remarks. However, the persistent absence of UK wage growth in the face of steadily falling unemployment and rising inflation poses a dilemma for policy officials.

The pound retreated modestly to $1.3552 on Monday and traded at £0.88 per euro. The policy sensitive two-year gilt was at 0.44 per cent and has climbed from a low of 0.16 per cent earlier this month, as traders have priced in a shift in the current base rate from 0.25 per cent to 0.5 per cent.

“There have been several times over Carney’s tenure as Governor that the BoE has sent such a signal to the market. It has not delivered, but of course, this time, like every time could be different,’’ said Marc Chandler, strategist at Brown Brothers Harriman.

With traders focused on monetary policy, attention may shift back to politics, with UK prime minister Theresa May’s keynote speech on Brexit in Florence on Friday acting as a curtain raiser to the political parties’ upcoming conference season.

Stephen Gallo at Bank of Montreal called Monday’s sterling slip “very strange”, adding: “It’s almost as if the FX thinks it’s being clever by anticipating an unrealistic stance from Mrs May, thus justifying a reversal of GBP strength.

“We would argue that there is still so much bad news factored into the pound, so anything along those lines in the prime minister’s speech should really be quite neutral for the FX market.”

HSBC’s Mr Bloom added: “The ticking clock on Brexit negotiations is likely to lend politics greater influence, especially if progress remains difficult to come by. The pound’s tight relationship with the interest rate outlook suggests very little is in the price for political risk.”

He forecasts the pound will slowly slide next year, from $1.33 in the first quarter, to $1.26 by year-end.

- Copyright The Financial Times Limited 2017