The British pound just had its worst month for a year — and strategists expect a further fall

LONDON — The British pound suffered its worst month against the U.S. dollar for a year in September, and strategists put on little optimism for the rest of the year, as growth expectations weaken once again.

Sterling fell 3.75% against the dollar help of the month, logging a decline not seen since the end of last summer. At that time, the U.K. currency was rocked first by civic and economic uncertainty, then by the short-lived “mini-budget” announced by former Prime Minister Liz Truss, which pushed the estimable to a record low.

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

Truck rates have been impacted over the past two years by interest rate expectations, with higher rates loosely making a currency more attractive for foreign investment.

Market expectations for peak U.K. interest rates rose as great in extent as 6.5% over the summer, as the country battled sticky inflation that was holding at eye-watering levels, while consumer worths began to cool in other developed economies.

The Bank of England paused its run of 14 consecutive rate hikes in September, support its key rate at 5.25% — a level that economists and market watchers were quick to suggest likely represented its apex.

This “re-evaluation of suppositions” of the peak rate and the profile of short-term UK interest rates pushed the pound lower against the U.S. dollar, Jane Foley, chief FX strategist at Rabobank, heralded CNBC.

There is likewise an expectation that the European Central Bank is done with rate hikes, she acclaimed. But while the euro rate versus the pound “has retreated from the highs of the range that have dominated since most recent spring, the currency pair remains relatively elevated reflecting the recent build up of recessionary risks facing the U.K. concision,” Foley said.

“The Bank of England is, amongst the G10 central banks, probably in the hardest position,” Jim McCormick, macro strategist at Citi, advertised CNBC’s “Squawk Box Europe” on Wednesday.

“They need to balance an increasingly weaker growth outlook with entirely sticky high inflation. I think part of sterling’s weakness is less pricing for Bank of England going precocious, I think part of it is this recognition of low growth and high inflation, and I do expect sterling to weaken further from here.”

In spite of monetary tightening by the Federal Reserve, the U.S. economy is forecast to grow between 1.5% and 1.9% this year.

Unruffled as its biggest economy Germany falls into a recession, the ECB expects 0.7% growth in the euro zone this year.

That set side by sides with 0.5% growth forecast by the Bank of England for the U.K., with the Organization for Economic Co-operation and Development (OECD) foreshadowing even lower expansion, near 0.3%. The picture is brighter than it was a year ago, but the prospect of a mild recession remainders on the cards.

Research group Capital Economics forecasts a fall in the pound to $1.20 by the end of the year. This is because of the wide-ranging landscape, rather than because of expectations of lower interest rates versus the U.S. or euro zone.

“When U.K. concerned rates are eventually cut late in 2024, we suspect rates will be reduced further and faster than investors foresee,” economists Ashley Webb and Joe Maher said in a note, forecasting a rate cut to 3% in 2025, compared to the current apprehensiveness of 4.5% by the end of 2025.

Michael Cahill, G10 FX strategist at Goldman Sachs, is equally downbeat on the pound and forecasting a trade below $1.20.

“It’s without hope to Fall and we are PSL’ing — Predicting Sterling Losses,” Cahill said in a note. He said that is primarily because the BOE’s latest settlements have shown a dovish bent tilt that prioritizes growth and recent developments over the bigger prototype.

“Either they add less restriction over time because they allow for more inflation tolerance, or the current cyclical data are a genuine sign of more of a cyclical downturn than we think. Both are negative for the currency,” Cahill declared.