The British pound on Thursday saw a significant decline, which Capital Daily analysts attribute to a combination of factors including the Bank of England’s (BoE) dovish monetary policy outlook, the currency’s high valuation, and extended speculative positions.
The pound’s more than 1% drop against both the US dollar and the euro represents one of the biggest daily falls against the dollar since the Trosonomics event two years ago and the largest against the euro.
The currency’s weakness is a reaction to recent dovish comments by Bank of England Governor Andrew Bailey, who suggested the central bank may become “a bit more aggressive” in cutting interest rates. This has prompted investors to adjust their expectations about UK monetary policy.
Despite this, the reaction in currency markets was somewhat unexpected, as adjustments in rate expectations were not significant, with only a slight decline in one- or two-year UK overnight swap rates compared to those in the UK. The United States and the Eurozone.
Analysts at Capital Daily noted that the pound’s valuation was relatively high, with sterling the best-performing currency in the G10 this year. Its real effective exchange rate has recently surpassed its level before the Brexit referendum in 2016, suggesting a strong valuation that may have contributed to the currency’s weakness.
The sudden decline in the value of the pound also appears to reflect the disintegration of speculative bets, which have become overextended. This dismantling has made the currency more vulnerable to changes in market sentiment.
Looking ahead, Capital Daily expects further decline in the value of the pound, especially against the euro. Analysts expect the Bank of England to make deeper interest rate cuts than currently expected, and given the pound’s high valuation and ongoing speculative pressures, they expect a drop from the current rate of €0.84 to €0.88 by the end of next year.
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