The pound is a graveyard for like G ten traders, the Pound, people only ever lose money on, even though it seems obvious.
So just why is the pound so unpredictable? It was a year ago this week that it hit a record low against the dollar. Since then it's been one of the best performing currencies in the G ten, but now analyssa calling for further slides as the outlook for the UK darkens. I'm David Merritt. Welcome to In the City, Bloombok's podcast connecting you to the conversations at the heart of the city of London. This week we dig into the outlook for the pound with me in the London studio.
We have Mark Hardmore, senior macro strategists on our Markets Live team and co hosts of our Markets Today program on Blouembok Television, and also Sofia Hauta Ecosta from our brilliant Markets Today blog.
I'm already going to expect us to provide some glimmer of like light or shed light and how to trade the pound, because it's completely impossible. The pound only ever does what you shouldn't expect it to do.
It's the currency you shouldn't trade, or it just doesn't behave how you want it to.
But I say this classic example was that, like you know, when cable was above two ten back and seven and eight, it was just everyone knew you need to be short. It was a wrong price. The fundamentals were so negative, and yet it was really really hard to make money just because everyone kept on trying to sell it. You get this big dip down of fifteen big figures going blow to the figure, and then suddenly it'd squeeze higher and stop every night, and it's just it's impossible to make money.
I mean, this is what makes the currency a very fun currency to cover. You know, I just moved here a few months ago, Dave. When I moved here, the pound was strengthening, and coming from abroad, everyone will say, you know, the UK economies and shambles, you know, there was so much doom and gloom, and yet it had a strengthening currency. And one of my colleagues on the blog said, you know, the pound is strengthening for all
the wrong reasons. It's the high interest rate environment because the BOE has to fight inflation and keep raising interest rates for longer. And now Mark is it kind of weakening for all the right reasons. I mean, how would you kind of frame it now?
So I've been someone who's been on the wrong side of this paneve. I've been burished the pound all this year and they've only started weakening recently, and it started as weakening as the fundamentals have improved. So up until May, we expected the UK economy to contract this year. Since May, we now expect a small expansion. The current account deficit, which was massive, I think it was more than five percent of GDP about a year ago, it's now, I'm
not sure exactly, less than three percent of GDP. It's kurry count deficts has been improving rapidly, and now finally we're getting inflation coming down in the UK with the outlier because of staying high. So it's it's still got deeply negative real yields, but the real fields are going the right directions. Almost all the fundaments are improving, and
now the UK is weakening. I do have a theory, tell Us tell us, But I said, I really that I've been getting sterling wrong, so I've got to disclaim it. I think that really everything in markets the moment is all about the consumer and you know, the one thing that's been really really getting worse. So you've got the economy of roles been getting betternacounts getting better, real rot it's getting bet all big macro factors getting better. But what we saw is last week and this reiterated, we
saw the lowest service as PMI in the UK. The flash estimate on Friday was the lowest since January twenty twenty one. And we also saw another deeply negative retail sales print year in year, and it's been negative for the past like a couple of years. And what you're
finally seeing is the people are going okay. The UK consumer is finally going off a cliff and I think a similar time into the US and that will be the fact where suddenly the higher rates aren't helpful because they're squeezing the consumer at vulnerable point and that's where
you start trading the stagflation dynamic. So I think what's happening in Sterling now is that up for the past year, it's trading in the rates support and now it actually might start trading the stagflation dynamic as the consumer suffers.
And that's another way of saying a recession, right, Yes, I think.
A very very tough recession. Actually a very tough recession. Yeah, and because remember, you know, the UK has been forced to raise rates more than people anticipated, and it can cope the higher UK rates. It's kind of much more leveraged economy, and as many people have written about this year, it's housing market is much moreulnerable to the rate rises because everyone talks about US as long term fixed rates.
And so even though mortgage rates thirty year mortgage rates in the US have gone up officially have gone up above seven percent, in practical terms, there's still like below four percent. So like, really the US housing markets are not being squeezed at all be higher rates, but UK really is okay.
So I like to disagree with Mark and I Marke and I famously always disagree, but also just to kind of like throw a little bit of optimism here. There have been calls for a UK recession for months. I mean, we might be in one now. That's what some economists are saying that you know, when a recession does happen, you only know it until months later there are cracks starting to show, but it has been so much more resilient and one thing we're seeing, we're hearing from retailers.
So this is kind of on the ground color that we're getting from the likes of Next and those m ands as well and older those companies that have been doing really well. Is that actually because wages are growing faster than inflation even though it you know, there is a real pay increase, and the consumer does feel better, and we might actually get a stronger u consumer than
the doom and gloom that people expect. And you know, if the UK does have a recession, it might be a shallow one and I think that's something if you are thinking of where the pound will go. And as Mark said earlier, you know, if you have in the entire kind of trading community and all those hedge funds betting one way, the risk is that you'll be caught out when the pound doesn't go your way.
Yeah. So last week the Bank of England stopped raising interest rates the first time in nearly two years. The most aggressive tightening cycle for decades came to an end. And I suppose it sounds like you're reading that sphere is a kind of a good sign because they saw the inflation print, they finally conquered inflation. Then the consumer can feel a bit better, or Mark, you seem to be saying that's because they thought recession is coming and we've got to stop now when we possibly overshot.
I think we can both be right, you know, I think I don't think it's a job done for the BOE. I think that's more of a US FED story. There is. It's still one of the highest inflation rates in the developed worlds here in the UK, and Andrew Bailey, Governor Andrew Bailey and his team are kind of warning of weakening demand. And I do think Mark is right, as much as it pains me to say that there are cracks in the consumer's story. But I just don't think it will be as bad as people fear.
But you say not as bad as pill fear. But and I understand that, like most of the last year, people were really really gloomy on the UK. I remember, you know, us covering on the show about like the peak pessimism was around December last year. It's been improving all year. We're now not expecting the economy to contract this year. We've got a little bit more negative about extra but we'll still expect your expansion next year. So the consensus out there is actually the UK to muddle through.
So I would say that the consensus is not gloomy anymore. I agree it was very incorrectly very gloomy. Does that mean because Pip got it wrong once that you should now fear that downside? Maybe? I mean, we have the same dynamic in many other countries in the world, and I would say that, you know, the the UK story, I do think will be still be very very negative as the next rak.
So what does that mean for the pound?
Right?
So we've got the I mean, we've got voices here in the Bloomberg story talking about some pretty negative forecasts. Right, We've got RBC and HSBC racing from all weakness. Bank of America BNP forecasting a sharper slide on the cars. We've got forecasts for one seventeen by year in one eleven by the second half of next year, according to somebody from RBC. I mean's that's a I mean one eleven for the pound. I mean you talked about the
heady days of more than two dollars. I mean, I remember those days, right when the pound was above two dollars, people were talking about parity. This time last year that seems to have receded, but one eleven is in the ballpark of parody, Right, we really heard that.
Well, one I'll say is I think a large change in those forecasts is about dollar strength. Right. So we entered this year with everyone being super bearish the dollar, and there people have kind of given up on that trade. And you know, one of the things that personally I'm becoming I do believe that the pound can weaken, but whether you know whether the dollar actually will be as strong when things might be problematic. So I think the pat on the Bloomberg Pound Index, for example, I think
it can continue to weaken. And I do wonder whether the eure A sterling styles a chunk of top side.
Yeah, I think I think That's the other kind of important thing to say about this. We are talking about pound weakness against the dollar, but maybe some of our listeners care more about what the pound does against the euro. Right, And the European Central Bank was one of the what was one of the only three between the FED, the BUE and the ECB that actually raised interest rates in this cycle. So what mark, what is the euro pound trajectory from here?
I mean, I'm not super bullish the euro either, but I just I think it's a way better way to look at the sterling story because I think the dollar moves have just been so much more dramatic this year than if you start looking at a cable view of the sterling dollar exchange rate. You know, it's very eas to get conflate whether you've got a dollar view or a sterling view.
I'm the four casts economically view there are not great. Again, I'm mean to your point about like these markets are interpreting the data in sort of slightly wacky ways. I mean, the latest numbers in from Germany, from France have been pretty grim on the economic growth front. So do you think the UK is actually going to fare a little better next year?
So this is actually really interesting. So European economy is a basket case not doing well, particularly Germany and stuff. However, going back to the thing is it depends whether you think the consumer is key to the story or not, because what's happened is the European economy the consumer is slightly more insulated during a recession if there's a global recession.
Not only do they have better savings rates around Europe and a less leveraged housing market generally in most countries in Europe, but they also have better social security, social
support system during it a slowdown. So if you think there's generally going to be a growth slowdown, UK consumer is one of the most exposed to slower growth and higher instruates, more exposed in the US, as we said, because there's long term mortgages, and more exposed than Europe because they don't have those high savings rates and as high social security. So if you're a negative on global growth and you think the consumer is key, you should
be very negative pound. If you're more rosy on the world, then Pound will continue to confound the bears.
The post Brexit story for me is really interesting because I mean the last time I lived here was just after the Brexit votes, so it's kind of like just coming back and seeing, you know, the UK trying to say we actually grew faster than Germany during COVID and kind of this competitive kind of comparing economic growth models. But I mean it's a very different story. I think the euro Area is complicated given you know, Germany is
a very different place to say Spain. It seems to be the kind of Northern Europe Southern Europe divide is going the other way, right, you know, Southern Europe is outdoing Northern Europe for growth for the first time in a long time. But how does the UK kind of factor in amid all that? And I mean, I just think people tend to be negative on the UK.
Is that a Brexit fallout thing? Like we're sort of assuming this economy was going to get smashed by Brexit and it's yes, we've seen there's impact, of course there is, but it's not been the total disaster that a lot of people predicted, and its economy keeps on sort of surprising on the upside, doesn't it.
I think it's just difficult to understand what the post Brexit story is from here. And I think, you know, just from an economic forecast model, where is growth going to come from in the coming decades? How do you kind of look at the currency story there? I think. I mean, when I moved here, I thought, Okay, I'm moving to a country that's in crisis, but it really
it really isn't. There's a lot of difficulties here, of course, But you know, I think that on the ground, if you go to the high street day of and if you go to restaurants and I know London is its own microcosm, but the consumer is more resilient to those
negative news. Maybe it's just used to negativity. It's you know, the UK consumer has gone through bouts of crises, and I think last year was such I mean, it was so volatile here in the UK, the kind of submerging market monoker that people used that you know, maybe maybe they can just kind of muddel along this time and you know, you still move here, right, even they still live here.
That's exactly right. Country and crisis, but people still wanting to come and live and work here, and the economy is sort of muddling, muddeling through. I mean, you know, it's it's a sense of crisis and lots of places in the world, right.
Yeah, I think you're right. I mean, look, UK and London in particular is always going to have an appeal for international investors, international money. People want to live here and it's going to retain that, right, London is one of the world's capitals, and so I think that gets a there's a there's a bit for UK housing, for UK lifestyle at a certain level. Now it's where is that level? Where is it ever? Price? But I think it does probably protect the UK from the real doom
mongery prognostications. And you know, you're talking about what is the post Brexit narrative, And I think one of the things that's hard is that it's clearly not been a wonderful story, but it's also been nowhere near the bad news story. We've been somewhere in the middle. And also that's been really that that middle, middle to slightly negative world is in the context we did have a pandemic, So like, you know, how much is the pandemic how Brexit.
So it's it's very hard to judge fairly and I don't think the verdict is out on how on how brexits worked out. But I will say that one problem which might still you know, foster may fester is a better whereever the years ahead is the fact that you know, the US communication, at least under a Biden presidency, the UK shouldn't even bother to seek a grand trade deal. Is a bit of a blow to that kind of whole UK taking control of its trade and kind of
really orienting itself in a much more dynamic way. And I think you know, it did that a little bit around the pandemic and some of its solutions. But I think otherwise that that could be a bit of a headwind going forward, that it's having to kind of little bit part trade deals around the place is going to be problematic for its kind of.
Out But the trend on the European front is definitely towards closer hich. I mean, even you know, Richi's sonat could manage to take a bit of the heat out of the debate. And then we've we've seen just the last week's Kissed Arma going to Paris talking about needing to renegotiate the deal. So the politics of this is that whoever wins next year, we are going to find maybe one a bit faster than the other in terms
of the speed of normalizing relations. But we're on a trajectory to a sort of better working relationship with the EU, which is only gonna be good for the UK economy.
Yes, I think so. Actually, insted up, we had this open ended question reasoning because UK stock has been discounted for a long period of time, and you know, we keep people on the show all the time. Okay, UK stocks are cheap, and I agree they are cheap, and almost any metric. They seem like a great story and you're like, what's going to change? They've been cheap for a long period of time. What's the catalyst for a
get upside? So we asked this as an open ended question our recent M Live Pulse survey, what will be the catalyst? And I would say a plurality of the answers was rejoined the EU, which is clearly a tongue in cheak kind of answer, but that's a feel think. But I do think close relationships with Europe will kind of help things. Actually, one of the things in that survey I thought was really interesting because it's already been debunked.
We ran the survey and only two week weeks ago, and we said UK tenor yields used to be below US tenure yields for years, and then as of trust anomics, they blew above them, and then they came back down after you know, Liz Trust went and we got new kind of government in place and it kind of seemed to calm down. But for the past six months, up until a couple of weeks ago, UK tenor yields were
comfortably above US yields. So we asked people when will UK tenure yields fall below US tenor yields, and we said, you know, will it happened before the end of this year, will it happened first half next year? And the third answer was UK tenor yields will stay above US tenure yields for years because UK has a risk premium post list trust. That was the most picked answer was that the UK tenory yields will stay above US ten yields
for it. And ironically we ran the Servitceco and ironically, in the past two weeks UK tenure yields have completely collapsed and are now twenty basis points below ten years. So already it's completely blown people up and confounded people. And I think this goes back to your story that people who get two doomed angry are probably going to be confounded. But I don't think that should be mistaken for going to going through a session that people called
forever came, Let's get positive. I don't think that's the conclusion.
So somewhere in the middle, which is probably the hardest story to trade.
Right exactly, I think that's the problem with the will Always money. I think the story is a negative is a negative story, but not a dramatically negative one and not a clearly negative untiming. And that's why I think it's going to become really, really difficult to trade. And what does this mean for like things like stocks, because if you got foot to one hundred, it normally benefits from a cheaper pound because it's got so much external exposure.
And again, will UK stocks finally start benefiting if we have a kind of muddled through, slightly negative story, but a weaker sterling that should actually help foot to you one hundred? But oh my god, no one ever makes money in this stuff.
What I'm getting from this conversation is that the pound is wildly unpredictable and anyone who tries to ben against it seems to get burned. What do you think is going to happen in twenty twenty fours?
Yeah, I mean, I do think having gone through a kind of can we call it a crisis? Last year? Was it a crisis?
I think we can call it.
I think we caning had to intervene to sure up.
Right, let's call it the crisis. Last year's crisis. I think that kind of woke people up, and it's just anything like last year is unlikely to happen again. And actually the survey which which Mark just debunked because it's no longer valid after two weeks. But no, but people in that survey now, in all seriousness, really don't expect that record load to be hit again. There has been a little bit of faith restored in the stability of the UK government at least when it comes to economic policy.
Let's see if that lasts heading into what will be an election cycle. I think that will be key. And if we're looking at cable again, it's not just a pound story. The pound is almost kind of subject to how people feel about the US or you know, how those yields that Mark mentioned or are moving. Because if the UK has a higher yielding currency, then it becomes more attractive for overseas investment because people just get more bang for the book. And also will the UK stock
market start to get inflows again? Is that a value play that people will finally get excited about. I think there are a lot of questions. There is a lot of negative sentiment around the UK. Interestingly, hedge funds are actually still net long the pound, which means that they're actually positioned for further gains even though they're trimming those positions. I'd be interested to see if they start shortening it, because that would be a really strong signal.
I just looked up the definition of crisis because I suspicious accounts of crisis, and it says the first definition I found on the internet a time of intense difficulty or danger. So under that it's definitely OK. So I'm just saying I think crisis is the right word to qualify that.
I would give us a worldly inaccurate prediction then for the next year.
I'm glad you pressed there, because the only kind of prediction I can give for the UK. But I think it's going to be I think economically it's going to be a more negative story than it's currently explanation. So the contensus forecasts are for UK to expand a little bit again next year, around half percent growth. It kind of varies a little bit. I think we will have
a recession over the next year. In terms of what that means for the pound, I think in G ten world it's going to be difficult because I do think that most of the volatility in that chart, apart from around the trust period, is provided by the dollar component, and I think that some of the other G ten countries have some of the similar problems that UK have.
That they have countries that are are leveraged to both the consumer and housing market that's now being squeezed by higher real rates just as global growth is slowing down.
So it's hard to pick it out, but I have to say I think Sterling can continue to underperform some of the actual emerging markets with better fundamentals where they've already got their books in order, and we always we look to the classic cases of things like Brazil or Mexico where they height rates really really aggressively and they've got real rates there in offer, and now they can
ease rates as recession is under control. They've got central bank credibility, and I think that's the key if you think the currencies are going to trade off central bank credibility, which many people will say that's probably fair over time. The Bank of England is pretty on the list. So I remain pretty bearished pound, but I think it's going to stay very hard to time.
You definitely got your serious face on that bit as well, Mark, so thank you. We're going to take that as a rap. Thank you so much. Mark and Sophia thanks, thank you, thanks for listening to this week's in the City. We will be back next week, but in the meantime, if you like our show, please head on over to wherever you listen to podcasts and rate, review and subscribe. It helps people find the show. This episode was hosted by
me David Merritt. It was produced by Summersardi, with additional editing by Blake Maples and special thanks to Mark Hadmore and Sofia Porta Ecosta.