UBS cuts six-month sterling forecast
UBS has cut its long-term sterling forecast to £1.50. It cites last week’s dovish Bank of England Monetary Policy Committee notes and a change in the committee voting pattern as decisive factors.
New MPC member Ben Broadbent tipped the MPC balance back to a 7-2 split, joining the dovish camp in voting to keep rates on hold. His predecessor, Andrew Sentance, had been in the hawkish camp.
Adam Posen continued his calls for further quantitative easing, while MPC members including Paul Tucker and Paul Fisher argued for potential further easing if soft UK data releases continue throughout the year, UBS notes. It highlights last week’s poor Confederation of British Industry sales numbers – the worst for a year – as influential. The bank argues that further austerity measure are likely to filter into the real economy before the year is out.
The rate swap market is not pricing in a BoE rate hike until June 2012 at the earliest, UBS says, pushing down sterling yields. “Lower rate expectations have hurt sterling over the last month but we favour further downside, particularly versus the dollar, which should stay in demand after the Fed's commitment to cease easing measures adds to an already unstable risk environment,” UBS concludes. They forecast GBPUSD at 1.50 and EURGBP at 0.86 in December.
In its weekly analysis of International Money Market positioning data, released yesterday (June 27), Citi suggested that leveraged funds were fractionally long on the pound. The bank noted, however, that the US Commodity Futures Trading Commission Commitments of Traders report data were released before Wednesday’s MPC minutes and before spot sterling had fallen through 1.60. In all likelihood, the bank argues, leveraged players are now net short on the pound.