The pound has just experienced its worst month in a year and strategists expect a new fall

LONDON – In September, sterling suffered its worst month against the US dollar in a year, and strategists show little optimism for the rest of the year as growth expectations weaken once again.

The British pound fell 3.75% against the dollar throughout the month, recording a drop not seen since the end of last summer. At that time, the UK currency was the first to be shaken by political and economic uncertaintythen by the short-lived “mini budget” announced by former Prime Minister Liz Truss, which pushed sterling to a level low recording.

The pound also fell 1.26% against the euro last month, recording its weakest performance since December 2022.

Exchange rates have been affected in the past two years by expectations about interest rates, and higher rates generally make a currency more attractive to foreign investment.

Market expectations for top interest rates in the UK rose as high as 6.5% over the summer, as the country battled persistent inflation that remained at eye-watering levels, while consumer prices began to cool elsewhere. developed economies.

The Bank of England stopped his execution of 14 consecutive rate increases in September, keeping its key rate at 5.25%, a level that economists and market watchers were quick to suggest It probably represented his apogee.

This “reassessment of expectations” for the cap rate and the profile of short-term interest rates in the UK caused the pound to fall against the US dollar, Jane Foley, chief currency strategist at Rabobank, told CNBC.

There is also a expectation that the European Central Bank has ended rate hikes, he noted. But while the euro’s exchange rate against the pound has retreated from the range highs it has dominated since late spring, the currency pair remains relatively elevated reflecting the recent buildup of recession risks facing the UK economy,” Foley said.

“The Bank of England is, among the G10 central banks, probably in the most difficult position,” Jim McCormick, macro strategist at Citi, told CNBC’s “Squawk Box Europe” program on Wednesday.

“They need to balance increasingly weak growth prospects with very high and very persistent inflation. I think part of the weakness of sterling is that in the future the Bank of England will be underpricing, I think part of that is the recognition of low growth and high inflation, and I think we expect sterling to weaken further from here.”

Despite monetary tightening by the Federal Reserve, the US economy is forecast to grow between 1.5% and 1.9% this year.

Even though its largest economy, Germany falls into a recessionThe ECB expects growth of 0.7% in the euro zone this year.

This compares with the 0.5% growth forecast by the Bank of England for the UK, while the Organization for Economic Co-operation and Development (OECD) predicts an even smaller expansion, close to 0.3%. He the image is brighter than a year ago, but the prospect of a slight recession is still in play.

Research group Capital Economics forecasts a fall in the pound to $1.20 by the end of the year. This is due to the global outlook, rather than expectations of lower interest rates compared to the United States or the Eurozone.

“When UK interest rates are finally cut at the end of 2024, we suspect rates will fall further and faster than investors expect,” economists Ashley Webb and Joe Maher said in a note, predicting a cut. rates to 3% in 2025, compared to the current expectation of 4.5% by the end of 2025.

Michael Cahill, G10 currency strategist at Goldman Sachs, is similarly bearish on the pound, forecasting trading below $1.20.

“We’re back in the fall and doing PSL: predicting losses in sterling,” Cahill said in a note. He said this is mainly because the BOE’s latest decisions have shown a dovish tilt that prioritizes growth and recent developments over the bigger picture.

“Either they add fewer restrictions over time because they allow for greater tolerance for inflation, or recent cyclical data is a genuine sign of a bigger cyclical slowdown than we think. Both are negative for the currency,” Cahill said.