Bearish interest-rate outlook

One of the main fundamental factors pressuring the pound in the months ahead is a bearish interest rate differential picture. Mazanec believes the U.S. Fed will remain aggressive in their monetary tightening, with room to hike rates toward 5.50 percent by year-end. That contrasts sharply with the BOE.

“[The BOE] cut rates once in 2005 and will be forced to cut rates potentially two times this year,” Mazanec says. Sean Callow, senior currency strategist at Westpac Institutional Bank in Singapore agrees, but he is only predicting one rate cut.

“We expect the BOE to cut the repo rate 25 basis points in the third quarter,” he says.

Analysts agree a rate cut by the BOE will likely spell further weakness for the pound. Mazanec says a break of 1.72 would open the door for a bearish swing down toward the 1.65 area, a zone he expects to it hit by the third quarter. On a 12-month outlook, he is calling for additional weakness to the 1.58 zone.

Callow’s firm expects to see the pound at 1.72 three months out, with a 1.68 target in six months.

Analysts at Credit Suisse were also bearish. In the March 17 edition of Global Economy This Week, the firm wrote “with the BOE on the sidelines, the erosion in carry should keep overvalued sterling on the defensive.” The analysts highlighted a 3-month target at 1.71 and a 12-month forecast at 1.65.