Pound under Siege with Mounting Bets It Will Drop Below $1/Less

Pound Under Siege With Mounting Bets It Will Drop Below $1

The UK's pound will drop to a level that was virtually unthinkable in recent decades: $1 or less, according to Bloomberg speculators.

The pound fell to as low as $1.0350 Monday, the weakest on record, options markets show traders expect it to keep falling. The three month risk-reversal contracts against the pound are near the most bearish since 2016, while others show a 43% chance it will hit $1 by the end of the year.

At the same time, analysts at banks including Morgan Stanley and Nomura International said they expect it to touch or cross that threshold.

Jordan Rochester, who is a London-based strategist for Nomura, said on Bloomberg Surveillance that it is going to get worse. I don't want it to be worse. After losing 6.5% in the past five days, the pound jumped as much as 0.9% to 1.0789 in Asia on Tuesday. In mid- 2021 the UK currency was worth around $1.4 and $2 as recently as 2008 The last time it approached $1 was in 1985, before major world powers coordinated to drive down the value of the dollar.

The pound was already pressured by the rise in the dollar before last week, in part because high energy prices were widening the UK's trade deficit and the Fed's rate hikes were drawing funds toward the US. The downward pull was intensified after the administration of new prime minister Liz Truss rolled out plans to impose large-scale tax cuts in the face of an economic slowdown.

That caused a record run out of UK government bonds, with investors anticipating it will add to the government's already sizable budget deficit. By stimulating the economy, the step would be in conflict with the Bank of England's efforts to curb inflation and cause policy makers to raise interest rates even further.

One-week implied volatility is much higher than longer-term contracts because of the turbulence in the currency market.

On Monday, BOE Governor Andrew Bailey tried to soothe markets by saying that the bank won't hesitate to increase rates by as much as necessary to control inflation. The statement did little to bolster the currency, which slid afterward.

The bank said it would take stock at its next scheduled meeting, quashed speculation that the Bank of England would enact an emergency rate hike to bolster the pound. Analysts were doubtful that it would have had a major impact, even if it had.

Strategists at Nomura lowered their target for the pound to $0.975 by the end of the year, anticipating it will breach parity by the end of November. Morgan Stanley strategists revised their pound calls to put a year-end target on the currency of $1.

In a note to clients Monday, Morgan Stanley currency strategist David Adams wrote that tighter monetary policy is unlikely to see GBP strength increase due to concerns about growth and fiscal sustainability.