HSBC: Prepare for 'extreme' moves in Sterling

While UK shares and property have all been hit by Brexit, the pound has suffered the most.

Sterling is already at close to 31-year-lows against the dollar in the wake of the UK’s shock vote to leave the European Union, and analysts are lining up to call the currency lower.

Deutsche Bank forecasts that the pound will reach $1.15 against the dollar by the end of the year, against the current exchange rate of around $1.30. Goldman Sachs predicted the pound could hit $1.20 soon while Mohamed El-Erian, Allianz’s chief economic advisor, said the two currencies could reach parity — or £1 for $1.

It makes sense that a lot of traders are shorting Sterling — betting the price will go down — at the moment.

Here’s the chart from analysts at HSBC:

HSBC analysts, led by Mark McDonald, said that while they expect the pound to hit $1.20 by the end of the year, the market is about to get choppy because of the “extreme” positioning:

“However, our analysis shows that whilst extreme positions are likely to be followed by sharp price moves, this price move may be in either direction. In other words, positioning tells you about future volatility, not about future direction.”

The big focus for traders is the Bank of England meeting next week on whether to cut interest rates:

“The coming week may be a particularly volatile time for GBP with the BoE meeting on Thursday (14 July). There are widespread expectations of a cut in the Bank rate; however, if the BoE either over- or under-delivers on expectations it is quite likely that there will be a dramatic response in the value of GBP.”

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