The British pound sterling has weakened 20% against the U.S. dollar year-to-date, bringing the currency's value to ~US$1.08 on Monday, and Nomura analyst Jordan Rochester expects the pound to fall below parity by the end of the year.
The pound is down ~0.4% in Monday morning (New York time) trading and fell as low as $1.035, in response to the new U.K. government budget introduced last week that cuts taxes and increases spending.
"This is a fundamental balance of payments crisis, with politicians hoping it will eventually calm down," Nomura research analyst Jordan Rochester wrote in a note Monday. "Hope is not a strategy, and markets are reflecting that."
He sees three factors that could lead to a recovery in the British pound — the Bank of England take the unusual step of a rate hike between regularly scheduled meetings; conservatives force the government to back off the tax cut/higher spending plan; and/or a further recovery of medium-term global growth expectations.
Against the backdrop of the weaker pound, Nomura has increased its forecast for the key Bank of England rate by 25 basis points. It now expects 75 bps of rate hikes in November and December, instead of its previous forecast of 50 bps. In addition, Nomura sees 50 bps increase in February and 25 bps in March, and scraps 25-bps of cuts it penciled in for 2023.
Nomura's Rochester expects GBP to reach parity by the end of November, fall to $0.975 by year-end and slide further to $0.95 in Q1 2023. As a result, Nomura suggests shorting GBP vs. USD. The bank also expects the euro to reach $0.90 by year-end. Euro is recently trading at $0.965, and down 15% against the U.S. dollar year-to-date.
Last week, the Bank of England raised its benchmark interest rate by 50 bps to 2.25%.
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