Investors are already pessimistic about the pound

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Investors are already pessimistic about the pound

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They see an economy that has been battered by Brexit and inflation at the highest level in more than a decade as good reasons to be bleak. The prospect of higher taxes weighing on consumers is a shoring up the conviction that the pound can't last much longer, although the currency has so far withstood Prime Minister Boris Johnson's troubles.

Jane Foley, head of foreign-exchange strategy at Rabobank, said the pound would be struggling by the end of the quarter as the approaching U.K. April tax hike highlights the pressure on real incomes. This will lead the market to rethink expectations about the amount of Bank of England rate hikes this year. She expects the pound to fall to $1.33 by the end of the quarter, down from $1.37 currently. The currency has climbed by 1.3% this year, making it one of the strongest foreign-exchange performers.

James Athey, investment director at Aberdeen Asset Management, started betting this month that the pound will depreciate against the yen. Amundi, Europe's largest asset manager, is underweight sterling. Standard Bank spokesman Steven Barrow, whose bets returned more than 48% last year, is advising clients to short the pound against the dollar.

Valentin Marinov, head of G- 10 currency research at Credit Agricole SA in London, said the current level was a reflection of the Bank of England's move to raise interest rates in December.

Marinov said that we maintain a cautious outlook on the overvalued pound.

Technical factors, like hedge-fund positioning, have also been responsible for the rally. The speculators slashed back on their bearish pound bets last year, which helped drive the currency higher. With fewer shorts crowded in the market, there is room for them to pile back in again, according to Marinov.

Other strategists like Goldman Sachs Group Inc. say the pound isn't over yet. Options traders are less wary. Bearishness on the pound is the lowest in almost two months, according to one-year risk reversals, a measure of market positioning.

Kamakshya Trivedi, Goldman's co-head of global foreign exchange, rates and emerging-market strategy research in London, said U.K. labor data was robust. There will be a strong sense that rates need to move higher, given the inflation increase and the limited hit to the economy from the omicron variant. There is still too much uncertainty for many. The pound is overbought for the first time in 11 months, according to a closely-watched momentum gauge, the 14 day relative-strength indicator.

Even bulls are circumspect. State Street Global Advisors Ltd. is long on the pound, but concedes supply-chain bottlenecks and labor shortages are major obstacles facing the economy.

Altaf Kassam, the firm's head of investment strategy and research for Europe, the Middle East and Africa, said we still find it hard to be too positive on the U.K.

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