© Reuters. Founder’s Pounds have little cheerfulness as ill omens collector
As the pound expands the deepest decline among developed world currencies, a number of market indicators are converging to suggest that the worst has yet to come.
Sterling slipped more than 3% over the past month, with losses accelerating this week as data showed the U.K. economy may be heading for the deepest recession in three centuries amid the coronavirus crisis. Technical charts and pricing of options point to more pain for the currency as money market bets rise that the Bank of England lowers interest rates below zero next year to revive growth.
Governor Andrew Bailey said on Wednesday that it is “pretty clear” that investors expect more quantitative easing from the BOE and that monetary solution is helping the government fund the cost of financial aid amid the pandemic. Vice Governor Ben Broadbent even hinted at the possibility of negative rates, while Federal Reserve Chairman Jerome Powell pushed back against the view.
A charting called the double peak signals more risk to the pound-dollar pair. Sterling has already broken the so-called neckline cut of the pattern on a closing basis, suggesting it could extend the decline by another 3% to test the support level of around $ 1.1850. It fell as much as 0.4% Thursday to $ 1.2181, the lowest level since April 7. Its 3.3% loss over the last month is the largest among advanced economies.
UK money markets are now pricing in negative rates in early 2021 in a similar move to the U.S. fed fund futures – also points to sub-zero interest rates around the same time. Such interest rate expectations may weigh more heavily on Sterling’s expectations, with recent comments from policy makers suggesting that the BOE could move faster than the Fed to ease policy.
The brew pessimism offers surprise for option traders. Risk changes, a barometer of market positioning and sentiment, have been steadily trading at levels that indicate a deep bearish outlook for the U.K. currency. There are also lingering signs that Brexit trade risks are not priced in yet, leaving the pound with the strongest set of headwinds among its peers.
- NOTE: Vassilis Karamanis is a currency and betting strategist who writes for Bloomberg. The observations he makes are his own and are not meant as investment advice
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