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Pound To Keep Falling Whatever The Outcome Of U.K. Leadership Race

Regardless of who wins the race to succeed Liz Truss as UK Prime Minister, one thing is clear: the pound is set to keep falling.

A stack of one pound sterling coins sit in front of a British Union flag, also known as a Union Jack, in this arranged photograph in London, U.K., on Wednesday, Oct. 14, 2020. Pound traders are remarkably nonchalant even as U.K. Prime Minister Boris Johnson's self-imposed deadline of Oct. 15 to get a trade deal with the European Union looms large. Photographer: Hollie Adams/Bloomberg
A stack of one pound sterling coins sit in front of a British Union flag, also known as a Union Jack, in this arranged photograph in London, U.K., on Wednesday, Oct. 14, 2020. Pound traders are remarkably nonchalant even as U.K. Prime Minister Boris Johnson's self-imposed deadline of Oct. 15 to get a trade deal with the European Union looms large. Photographer: Hollie Adams/Bloomberg

Regardless of who wins the race to succeed Liz Truss as UK Prime Minister, one thing is clear: the pound is set to keep falling.

That’s the prognosis of market players who see sterling continuing its descent as economic headwinds and the Bank of England’s policy stance act as a drag. Three-month risk-reversals for the pound -- a gauge of its expected direction over that time frame -- remained deeply in negative territory.

Pound To Keep Falling Whatever The Outcome Of U.K. Leadership Race

The pound’s travails are emblematic of the challenges confronting the UK economy as rising borrowing costs, crippling energy bills and high taxes cloud the outlook. With consumer confidence near historic lows in October, signs are growing that sterling may extend a drop that has reached 17% this year.

“I expect GBP to remain pressured and international investor confidence in gilts and sterling will take time to recover,” said Patrick Bennett, strategist at Canadian Imperial Bank of Commerce, predicting that the currency may slide to $1.09 by year-end. “After personnel changes to date, the hurdle to regain that confidence keeps getting higher.”

Sterling rallied as much as 1% to $1.1336 on Thursday before paring gains as hawkish Federal Reserve rhetoric bolstered the dollar. Fitch Ratings had cut the nation’s credit outlook to negative from stable, citing fears that unfunded tax cuts may widen the fiscal deficit.

The pound fell 0.2% to $1.1215 in Asia on Friday.

Pound To Keep Falling Whatever The Outcome Of U.K. Leadership Race

The currency’s next cue may come from the government’s fiscal plan, with the Times reporting that UK Chancellor Jeremy Hunt is likely to delay the announcement of the blueprint beyond Oct. 31.

“The UK budget and government will need to demonstrate a return to fiscal discipline, basically a credible fiscal trajectory,” said Christopher Wong, a strategist at Oversea-Chinese Banking Corp. in Singapore.

An even bigger problem for the pound may be the Bank of England’s monetary policy stance after Deputy Governor Ben Broadbent said Thursday it’s not clear that UK interest rates need to rise as much as investors expect. 

“We are bearish GBP as a house, but more because of the stagflationary mix and questions about whether the BOE will be as aggressive as they need to be,” said Tim Baker, head of macro research at Deutsche Bank AG in Sydney, Australia. 

--With assistance from .

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