Goldman, PGIM expect pound to rise to US$1.30 as BOE defers rate cuts

A GROWING chorus of investors expects the pound to rally to US$1.30, a level last sustained two years ago, arguing that the Bank of England (BOE) will prove reluctant to cut interest rates as quickly as its peers.

Banks, including Goldman Sachs Group Inc, are homing in on the level, citing stronger-than-expected growth. PGIM Fixed Income is focusing on the possibility that the Conservative Party may push for tax giveaways in an election year. Both would keep inflation elevated and require tighter monetary policy.

“There’s life in the pound,” said Guillermo Felices, global investment strategist at PGIM Fixed Income. “Currencies love a tight monetary policy and loose fiscal policy, and we’re getting a flavour of this in the UK.”

The pound is the only major currency to have largely bucked the dollar’s strength this year, trading less than 1 per cent weaker against the greenback. It is a welcome change from headwinds faced over the past two years. In 2022, sterling fell close to parity against the dollar, part of the market fallout following Liz Truss’s unorthodox economic policies. 

Now, with UK interest rates at a 16-year high of 5.25 per cent, and a majority of economists surveyed by Bloomberg expecting the BOE to stand by its hawkish position when it meets later this week, the road for further gains looks clear. 

“Sterling has benefited considerably from the global disinflation trend and shift toward policy easing,” wrote Goldman Sachs strategists, including Isabella Rosenberg. “Both of these factors have helped support sterling via better risk sentiment and by making the BOE less of a dovish outlier.” 

The bank sees sterling at US$1.30 and 0.84 pence per euro in the next few months. 

Money markets favour four quarter-point rate cuts from the BOE this year, which would take the key rate to 4.25 per cent. That compares to at least five equivalent reductions expected from the Federal Reserve, bringing rates to a range of between 4 and 4.25 per cent in the US. The Fed’s next meeting is on Wednesday.

At Vanguard Asset Management, portfolio managers have been shifting to an overweight position on the pound, arguing that UK policymakers will hold rates higher than many expect. 

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“Markets are not paying attention to the change of rhetoric from the BOE,” said Ales Koutny, who manages active fixed income funds for the firm. “While they were considered reluctant hikers previously and seen as dovish by the market, we believe that even when they cut, they might be reluctant cutters too.”

Still, the UK’s sluggish growth could mean the pound’s strength is short-lived. PGIM’s Felices only expects the UK to eke out just 0.4 per cent economic growth this year, similar to that in the eurozone. 

“I expect the pound to perform relatively well, so long as BOE expectations remain where they are, but as soon as this rhetoric turns, it should suffer,” said Antony Foster, head of G-10 spot trading at Nomura. “It’s a hold-your-nose position.” BLOOMBERG