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Pound Rally to End as Market Is Wrong on BOE Path, Candriam Says - BLOOMBERG
(Bloomberg) -- The pound’s rally looks vulnerable and the currency could fall sharply as markets start to price in deeper interest-rate cuts in the UK, according to a fund manager at Candriam.
Jamie Niven is getting ready to short the pound against the euro, as he says there’s too big a gap between where markets see rates ending up in the UK and euro area. Crowded positioning could exacerbate a slump, he added.
The pound is one of the world’s best performing currencies this year, buoyed by expectations the Bank of England will lower rates more slowly, and by much less, than the European Central Bank. Traders see the UK benchmark rate falling to 3.4% compared to less than 2% in the euro area.
“The UK and the European economies are much more similar in nature than the UK is to the US for example,” said Niven, who manages Candriam’s total return bond fund. “Therefore should it be that the UK trades above US and significantly above Europe? No.”
The fund is bullish on UK rates and Niven said what’s keeping the BOE cautious is services inflation, which accelerated to 5.6% in August. But officials will soon have a clearer picture on the outlook for the sector as year-end wages negotiations are concluded, he said.
UK policymakers kept rates steady at 5% last week, following a quarter-point cut in the previous meeting, and warned investors it won’t rush to ease policy. Swaps fully price another reduction in November and see a 56% chance of a cut in December.
The ECB, meanwhile, lowered rates twice this year and markets have grown confident on another quarter-point reduction in October as euro-area economic data disappointed. The central bank is also expected to cut in December.
Monetary policy expectations for the UK and the euro area are now the most divergent they’ve been so far this year, with the gap between two-year interest-rate swaps surging above 170 basis points, the widest since December. That has supported the pound, which is up 3.8% versus the euro this year and near its highest level since April 2022.
“I think there’s definitely potential for the UK curve to move lower, certainly on a relative basis,” Niven said. “I think that can happen quite quickly and quite aggressively.”
