The pound fell to an eight-month low against the dollar yesterday, to $1.523, following news that the governor of the Bank of England Sir Mervyn King had been pushing for another round of monetary stimulus.
This is in sharp contrast to the US, where improving growth prospects have led the Federal Reserve to consider making an early exit from quantative easing, despite the absence of a substantial improvement in the labour market. This would continue to support the dollar versus sterling in the near term.
Chris Saint, senior currency analyst at Hargreaves Lansdowne, said: “The key message to investors thinking of selling is to think about currency early on. We enable investors to lock into the current exchange rate and offer forwards of up to two years. It’s difficult to forecast changes over the long term, but those thinking about currency now are in a really good position to take advantage of the current valuation.”
Gilts will also continue to suffer, as Stuart Frost, co-head of RWC’s absolute return bond and currency, commented: "With the BoE’s focus on more targeted tools rather than quantitative easing, and inflation set to stay high, the outlook for Gilts is not pretty. Short Gilts, long Bunds is already a consensus trade."
But he does not see much more downside for the pound in the near term: "We continue to have a negative bias for Sterling, however given the recent depreciation, and the fact that GBP shorts in the market are now fairly large, it’s hard to see another big move downwards in the absence of further bad news or central banker jawboning."