Still of Andrew Bailey. File image. Source: FT.com.
Pound sterling forecast lowered at major Dutch bank.
ABN AMRO has announced midweek it has cut its forecast profile for the pound against the euro and dollar as it no longer thinks the Bank of England will raise interest rates this year.
"After Governor Bailey’s dovish speech last Friday in Reykjavik, we changed our Bank of England base case to a prolonged pause. Previously, we expected a rate hike over the summer," says ABN AMRO in a note out Wednesday.
In his speech, the Governor said the Bank's decision to take rate cuts off the table at recent meetings had already had the effect of pushing back against inflation: "we have already tightened policy considerably in response to the shock relative to what had been expected by markets. And that is already affecting the economy."
Above: An interest rate (via 2-year bond yield in lower panel) has supported pound-to-euro to the 1.16 level and underpins a steady uplift since November (blue trendline in upper chart).
ABN AMRO economist Bill Diviney says the repricing in market expectations in favour of rate hikes has pushed up lending rates. For instance, the repricing raised mortgage costs by at least 1%; "this alone is likely to slow economic activity."
ABN AMRO thinks the Strait of Hormuz will be reopened this summer, which would lower energy costs and lessen the odds of ensuing inflation elsewhere in the price basket, allowing for a change in tone at the Bank of England regarding the outlook for inflation and interest rates.
"We expect the Bank of England to resume cutting rates in early 2027, once the impact of the energy shock starts to fade. Our base case includes two rate cuts in 2027, bringing Bank Rate to 3.25%," says Diviney.
That Will Weigh on Pound Sterling
For the pound, the looming central bank shift is a headwind, says ABN AMRO's currency strategist, Georgette Boele.
"We now expect sterling to be weaker," she says. "The main reason is our change in the Bank of England policy outlook. Markets are currently pricing in around 50 basis points of rate hikes this year, while our view is more dovish than that consensus. As a result, the absence of rate hikes assumed in our updated BoE view is likely to weigh on sterling this year."
She is also wary of uncertainty and speculation about possible changes in government fiscal policy as the current government of Keir Starmer comes under pressure, which risks increasing volatility in gilt and currency markets.
GBP/USD is now forecast to end the year at 1.36, a downgrade from 1.40. The pound to euro exchange rate is seen ending the year at 1.1360, down from 1.1630 previously.
We're Bullish on Sterling Says Deutsche Bank
It's not all downside views in FX land, though: we reported yesterday that Deutsche Bank says that while the bearish case for pound sterling is well known, the market may already have priced in too much negativity.
And that's an opportunity to tactically position for upside, says Deutsche's strategist George Saravelos.
Today we run with "Pound Sterling's Secret Support: Nobody Likes It", an article that points out traders remain heavily positioned for ongoing sterling weakness as political headlines remain gloomy and concerns about the UK's economic outlook persist.
Despite that, the data keep refusing to cooperate by coming in ahead of expectations, and a heavy one-sided bet for pound sterling weakness could mean positioning is actually a tailwind for gains.
That being said, it's hard to argue that the pound's recent resilience isn't tied to elevated Bank Rate expectations: any determined shift lower in those expectations could flip the outlook bearish, as ABN AMRO argues today.