Goldman Hits $1.30 Pound Bet in Just a Week as BOE Seen on Hold – BNN Bloomberg
(Bloomberg) — It took just seven days for the pound to vindicate Goldman Sachs Group Inc.’s bullish call.
The currency rose as much as 0.4% on Wednesday, pushing past $1.30, as traders pared bets on an interest-rate cut from the Bank of England in August. Goldman last week recommended a tactical trade betting that level would be hit within two weeks, when the currency was trading around $1.28.
A couple of days later, as the pound pushed higher, it put out an even more aggressive target of $1.31.
The speed of sterling’s appreciation underscores how attractive it’s becoming relative to other currencies, cementing its position at the top of the Group-of-10 pack. The pound is up more than 2% this year, trading at the highest level in a year.
The UK’s economic growth is improving and inflation remains persistently high, curbing expectations for lower interest rates as other central banks tilt toward easing. Optimism around the new Labour government is also contributing to gains, as it puts Britain in sharp contrast to France and the US, where political uncertainty continues to weigh on sentiment.
The latest boost came on Wednesday, when data showed UK consumer prices rose 2% in June from a year ago. While that’s the same pace as the month before — services inflation remained higher than the BOE predicted in its last forecasts. Given policymakers watch this gauge closely for the underlying trend, it suggests they could hold off lowering borrowing costs for longer.
“Today’s data should close the door on an August rate cut,” said Zara Nokes, global market analyst at J.P. Morgan Asset Management. The inflation print “is likely stronger than the data the Bank is looking for to start cutting rates.”
Markets will now turn to a reading on jobs, including wages, due on Thursday followed by retail sales figures on Friday.
“Tomorrow’s wage data is now key for the MPC and for markets,” said Nick Rees, FX analyst at Monex Europe. “A hot private sector pay growth reading should kill off any lingering prospect of a cut to Bank Rate in August, which could put $1.31 in play.”
Goldman Sachs had a target of $1.30 at the start of the year, and their call last week was a tactical recommendation on dollar weakness, Karen Reichgott Fishman, a VP for FX and emerging market strategy, wrote in a report dated July 10.
BOE officials, including Chief Economist Huw Pill, have expressed concern about lingering inflationary forces in the labor market and services sector. They have signaled they want to see more concrete evidence that price pressures are subsiding before loosening policy.
“Naturally, the figures cast doubt on the MPC delivering the first 25-basis point cut of the cycle at the August meeting,” said Michael Brown, a strategist at Pepperstone. This should buoy the pound, “particularly with the FOMC all-but-certain to kick-off their own easing cycle after the summer break, potentially opening something of a transatlantic policy divergence.”
–With assistance from Alice Gledhill, Greg Ritchie and Naomi Tajitsu.
(Updates with Goldman Sachs’ most recent pound target in the third paragraph. A previous version of this story corrected the date of the inflation report in the fifth paragraph.)
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