Pound finds few allies despite a hawkish BoE

For all the sterling strength spurred last week by the Bank of England governor Mark Carney’s hawkish comments, strategists aren’t rushing to raise their forecasts.Goldman Sachs Group is sticking to its call for the pound to fall to $1.20 in the next 12 months, while HSBC Holdings still sees a depreciation to reach that level by December. The median year-end forecast in a Bloomberg survey of economists is for $1.27, a 2% drop from current levels after the currency rallied that much in the last week.“We continue to believe that pound is headed to $1.20 against the dollar and to parity against the euro by year-end,” HSBC analysts, including global head of currency strategy David Bloom, wrote in a recent note. “The last thing the UK needs in our view is an unnecessary rate rise being added to the already difficult economic and political outlook.”Investors now price a 65% probability of a BOE rate increase by the end of 2017, up from 7% before its June 15 meeting, based on overnight money market rates. The shift came after increasingly hawkish rhetoric from policy makers, culminating in Carney saying on Wednesday that “some removal of monetary policy is likely to become necessary.” The comments triggered sterling’s biggest jump against the dollar since April.But with the June 8 election weakening the ruling Conservative Party’s position as formal negotiations to leave the European Union start, analysts remain sceptical on the pound’s longer-term outlook. Economic data has also been undercutting expectations, making the case for tighter policy debatable.Goldman analysts, including Andrew Benito, said they hold a less hawkish view on monetary policy than the market is pricing as they foresee a slowdown in the UK economy and that “Brexit uncertainties will not be resolved quickly.”They highlight that Carney reiterated the BOE must consider what he called the “output and inflation trade-off.” Goldman analysts say this means that the central bank’s ability to look through rising inflation requires “a further narrowing of the slack in the UK economy, which we do not expect.”MUFG also hasn’t changed its forecast, though it does see the BOE giving sterling a fillip. Recent developments “support our view that the hawkish shift from the BOE will provide more support for the pound in the near-term,” wrote Lee Hardman, a currency analyst at MUFG.UniCredit analysts including Marco Valli disagree with markets’ interpretation that recent developments may have raised the possibility of a softer Brexit or that the BOE is likely to hike soon. They maintain a bearish bias on sterling’s medium-term prospects, targeting $1.28 by end-2017, and see signs of a “persistent slowdown” for the economy.Euro bulls emboldenedThe euro is extending a rally that was little heralded at the beginning the year and now has analysts pondering what it will take to slow the best performing major currency this quarter, according to a Bloomberg report.For chartists from JPMorgan to RBC, there are few resistance levels remaining before the euro lifts off in a sustained rally amid fading political risks and a monetary policy shift on the horizon. With the $1.13 post-US election high giving way after five futile attempts this month, euro bears’ last lines of defence include $1.1428, a level reached as traders awaited the result of the UK’s vote to leave the European Union on June 24, 2016, before the common currency advances to the $1.17 area last seen in August 2015.“The November high was really important and we did push through it,” said Niall O’Connor, a technical analyst at JPMorgan.