Pound’s No 1 fan sees rate rise

Sterling traders are making a costly mistake to assume a doveish Federal Reserve will prompt the Bank of England to delay raising interest rates, according to the biggest sterling bull.

UniCredit predicts Britain’s currency will strengthen 6% to $1.65 by the end of the first quarter of next year, making it the most optimistic forecaster in data compiled by Bloomberg, which has a consensus view for a slight decline.

Italy’s largest lender says the Fed will increase rates in December, with the Bank of England following two months later. That’s a contrast to the futures market, where traders aren’t anticipating a BoE lift-off until late 2016 after the Fed stood pat on monetary policy last week. Higher interest rates tend to boost currencies.

“The process of policy normalization in the UK will start sooner than the market expects,” said Roberto Mialich, a Milan- based senior foreign-exchange strategist at UniCredit.

UniCredit has had a mixed track record in forecasting the pound this year. Like most other contributors to Bloomberg’s survey, it failed to predict sterling’s 5% decline versus the dollar in the first quarter, though it correctly forecast a second-quarter rally.

Britain’s currency advanced to a seven-month high of $1.5930 in June, but has since fallen. Those ups and downs have left sterling little changed this year, while it’s up 7% versus the euro at 72.45 pence.

UniCredit’s Mr Mialich says the pound will strengthen against the dollar because higher US borrowing costs are already factored into markets, while a boost to UK rates isn’t.

Focusing only on “short-end differentials” is misguided, according to Hamish Pepper, a foreign-exchange strategist at Barclays, the most bearish forecaster in Bloomberg’s survey and the world’s third-biggest currency trader.

He’s more concerned with “government-related risk,” including the administration’s spending cuts and forthcoming referendum on Britain’s membership of the EU.

Barclays predicts the pound will tumble to $1.43 by the end of the first quarter of 2016, the most pessimistic of 57 estimates compiled by Bloomberg. At the other end, UniCredit’s prediction is 7% stronger than the $1.54 median forecast.

The Italian lender is less optimistic on the pound versus the euro, expecting it to remain little changed at 72 pence, compared with Barclays’s estimate of an appreciate to 67p, and the 69p median.

Bloomberg