Currency Traders Predict Bank Of England Mistake

Bets against the pound are intensifying amid speculation that any Bank of England efforts to curb inflation would darken the outlook for growth and consumer sentiment.

Speculators ramped up wagers on sterling’s decline at the fastest rate in more than two years, Commodity Futures Trading Commission data show, further breaking the link between anticipated rate increases and currency gains. Meanwhile, strategists at Canadian Imperial Bank of Commerce, RBC Europe Ltd. and Societe Generale SA are bracing for the pound to slump to levels last seen in late 2020.

Money markets increased their expectations for BOE tightening this week, anticipating a 15-basis-point increase in December and another 50 basis points by June. That would bring the central bank’s key rate to 0.75% from 0.1% currently. Yet the prospect of several rate hikes is raising concern that rapid policy tightening will hurt confidence among consumers already grappling with soaring energy prices and supply chain disruptions.

“It’s all happening faster than forecast,” said Kit Juckes, chief foreign-exchange strategist at Societe Generale, who sees the pound falling toward $1.32 in the coming weeks. “If the BOE tightens into the teeth of a slowdown, it could quite quickly be seen as a mistake.”

Sterling steadied at $1.3587 at 9:04 a.m. in London on Tuesday after data showed record job vacancies and a surge of hiring in September. Underlying wage growth rose to between 4.1% and 5.6% in the three months through August, indicating price pressures in the economy that have started to concern the central bank.

Options traders are adding to bets on a pullback for the pound, with three-month risk reversals signaling sentiment is near the most bearish in seven months.

Bank of America strategists said the phenomenon of high inflation and low growth seems to be hitting the U.K. harder than most, and that any strength in the pound is an opportunity to sell. The currency could end the year little changed at $1.37, analyst Kamal Sharma said, adding that his colleagues are concerned about the squeeze in real incomes caused by high inflation and the end of furlough.

Michael Saunders, one of the most hawkish members of the Monetary Policy Committee, suggested in remarks published Saturday that investors were right to bring forward bets on rate hikes. Hours earlier, Governor Andrew Bailey warned of a potentially “very damaging” period of inflation unless policy makers take action.

Jeremy Stretch, head of G-10 foreign-exchange strategy at CIBC, noted that tightening could raise costs on liabilities such as mortgage payments and deter households from spending.

“A rate hike would risk undermining the U.K. recovery narrative,” said Stretch, who predicts a decline of more than 1% to around $1.34.

For RBC currency strategist Adam Cole, who sees the pound slumping by more than 4% to $1.30 by year-end, higher rates are a key driver for his pessimism on the U.K. currency.

Concerns about central bank moves “are simply adding to the squeeze on real incomes that higher energy prices and tighter fiscal policy are already delivering,” he said.