Pound’s Fortunes Look Even Worse Than Europe’s Battered Currency - BLOOMBERG
AUGUST 05, 2022
(Bloomberg) -- The pound’s fortunes are so bad they now look worse than the euro’s.
A looming UK recession, double-digit inflation and a new government are set to hit sterling in coming months. That’s led traders to hedge on a drop against the euro, even as Europe’s common currency struggles because of the region’s gas supply risks.
They are piling into call options to buy the euro versus the pound, with the highest concentration lying at around 85-87 pence, up to 3% higher than where it’s currently trading. In the spot market, the euro has already gained nearly 1% over the past three days against sterling, in a recovery from a three-month low hit in early August.
The euro is expected to stay weak this year against the dollar. The continent faces an energy crisis with the risk of Russia choking off gas supplies, while the European Central Bank has lagged peers in hiking rates to tackle inflation, and there’s also a political crisis in Italy.
Yet analysts are even more pessimistic on the pound’s prospects, with some targeting a slide to historic lows versus the greenback. The Bank of England’s warning of a long recession raises the possibility it may have to reverse course and cut interest rates next year.
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“Based on current prices and what we expect of gas prices going forward, we still see a case for euro-pound to go higher,” said Mikael Olai Milhoj, senior analyst at Danske Bank A/S. He sees the euro rising to 86 pence in the next three months, in line with the market consensus.