The British pound has fallen out of favour among currency investors so far in 2013.
Since hitting a high of 1.6379 against the U.S. dollar on January 1, the pound sterling has tumbled nearly 4 per cent to today’s levels around 1.5735 (click to enlarge):
Société Générale Head of FX Research Kit Juckes says that at this point, “Sentiment towards sterling is getting to be about as negative as it can usefully be.”
Juckes says three bearish arguments for holding pounds are all hitting the market at once:
- U.K. GDP, which was expected to fall 0.1 per cent last week, actually fell 0.3 per cent, which has everyone talking about a “triple-dip” recession in Great Britain. Juckes says this is a big reminder for investors of how the British economy continues to underperform as a global recovery begins to form.
- British Prime Minister David Cameron’s recent speech proposing a referendum on the country’s membership in the EU, Juckes says, “will do nothing to attract the capital inflows needed to offset a huge current account deficit.” Big current account deficits usually mean weak currencies.
- Mark Carney is set to take over the Bank of England when current Governor Mervyn King steps down in June. Given Carney’s comments on unconventional monetary policy and his track record in that area, investors are betting that Carney will bring a dovish stance to the post and allow the pound to weaken further. Juckes says, “This view lacks sound foundations, but is prevalent all the same.”
Meanwhile, the euro has surged since the latest ECB policy meeting, when ECB President Mario Draghi suggested that there was no discussion on cutting interest rates. Now, the consensus view is that the ECB is beginning to tighten policy, which is supporting the euro’s climb higher against other major currencies like the pound sterling.
Juckes writes in a note to clients that the pound can keep going lower, too:
What can undermine sterling even more than the dollar is the vulnerability to reduced investment flows and the continued weakness of the economy.
The UK is a small open economy that has benefited from capital inflows because it is NOT in the euro area but IS in the EU. The former is less helpful now, the uncertainty about the latter a clear negative.
The result could be to take EUR/GBP close to 0.90 before the long-term downtrend resumes.
All of these factors, Juckes says, have turned the pound sterling into the “whipping-boy of FX markets.”