Pound forecasters catch up with rally as BOE boosts bulls

[LONDON] The pound's dramatic reversal of fortunes this month has left analysts racing to catch up.

Strategists are revising their estimates for the currency after its best week since 2009 saw it gain almost three per cent as the Bank of England signalled it would look to withdraw stimulus "over the coming months".

Sterling touched US$1.36 on Monday, while the median forecast for the end of the fourth quarter lagged behind at US$1.29.

HSBC Holdings, Banco Bilbao Vizcaya Argentaria SA and Mitsubishi UFJ Financial Group all revised their outlook for the pound following the central bank's statement on Thursday, while Morgan Stanley said on Monday it would likely adjust its forecasts.

Sterling retraced some of last week's gains on Monday but strategists still saw potential for further strength. The market is now pricing a 73 per cent chance of a rate hike in November this year, with two hikes fully priced in by November 2018.

"The Bank of England's unexpected hunger to join other Group-of-10 central banks in the race to the exit from accommodative monetary policy has given additional impetus to sterling," said HSBC strategist David Bloom in a research note, with the bank expecting two rate rises by May and revising its end-2017 forecast to US$1.35 from US$1.20.

MUFG, which raised its estimates on Thursday, saw sterling ending 2017 at US$1.33, from US$1.29 previously.

The pound-dollar pair could also benefit from the Federal Reserve being "viewed as less likely to follow through with a final rate hike this year", said analyst Lee Hardman in a note.

Nomura International has priced in two rate hikes by May and saw sterling ending the year at US$1.40, yet there are risks to this bullish view, said strategist Jordan Rochester.

If economic data suddenly weakens considerably, the Brexit negotiations go badly or if UK Prime Minister Theresa May's speech on Friday is "more of the same and she doesn't announce a transitional deal," sterling would suffer, Mr Rochester said.

BBVA, which revised its year-end forecast to US$1.30 from US$1.26, saw a risk investors would be disappointed after the BOE stoked expectations.

"If the Bank of England disappoints in November, the market will have to postpone the first rate hike by a further month," said strategist Alexandre Dolci.

"Sterling is likely to reverse part of the rally it has made in the past week."

BLOOMBERG