Goldman Sachs Asset Management says the pound is set to strengthen against the dollar as the Bank of England will probably raise interest rates sooner than the market predicts.
The pound has fallen about 3 percent from this year’s high versus the greenback as markets have pushed back estimates to beyond December 2016 for when the U.K. central bank will act. Goldman Sachs Asset Management predicts the BOE will probably increase rates in the first quarter and the market is “now properly underestimating that risk,” said Philip Moffitt, Asia-Pacific head of fixed income at the firm in Sydney.
U.K. data this month have shown the jobless rate unexpectedly dropped to the lowest level since 2008 and wage growth, excluding bonuses, was near the highest in six years. Higher interest rates are positive for currencies as they provide a greater return for investments.
“When we look at all the major economies, the U.K. seems to be the one where the labor market tightening up actually seems to be generating some signs of wage inflation,” said Moffitt, whose firm oversees or advises on more than $1 trillion. “We’ve had a view for quite a while that the Bank of England would be moving early next year, and they’ve not said anything for us to change our view.”
The pound fell from this year’s high of $1.5930 set on June 18 to as low as $1.5108 on Sept. 30. It gained 0.2 percent to $1.5465 as of 10:07 a.m. in London on Monday.
Sterling has weakened against all except one of its 16 major counterparts since the Federal Reserve’s Sept. 17 decision to keep its own benchmark rate on hold. The Fed cited increased global risks in its policy statement, fueling speculation the same reasons will restrain the U.K. central bank. The pound has slumped 0.8 percent against the greenback since then.
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