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NatWest Markets - the investment banking arm of the high-street brands RBS and NatWest - have exited a long-held bet for Pound Sterling to rise in value against the Euro.
Strategists at the bank have expressed caution on holding pounds heading into next week's Bank of England policy meeting, expecting bullish investors to be disappointed by Governor Andrew Bailey and his team.
Markets anticipate a rise in the Bank Rate of 15 basis points to be announced, which would take the rate off its all-time low to 0.25%.
But not only must the Bank deliver a hike it must also sound sufficiently 'hawkish' to keep alive expectations for a series of further hikes in 2022.
But NatWest says the Bank will fail to live up to lofty expectations and this could trigger selling in the Pound.
Furthermore, some economists have warned that hiking rates at such a fragile moment for the economic recovery could negatively impact growth to the extent the Bank ultimately reverses rate hikes in what is known as a 'policy mistake'.
"Sterling is a balance between favourable moves in yields and a higher risk premium that incorporates both policy mistake and downside growth risks," says Paul Robson, Head of G10 FX Strategy at NatWest Markets.
Above: GBP/EUR is up 6.0% in 2021.
FX transfers: Secure a retail exchange rate that is between 3-5% stronger than offered by leading banks, learn more. (Advertisement).
He says that while is time to book profit on the move higher in the Pound to Euro exchange rate but he is opening reassessing this stance once the November 04 policy meeting has passed.
The Pound has rallied against the Euro and other major currencies over recent days on anticipation of higher interest rates at the Bank of England.
Faced with rising inflation markets officials at the Bank of England have warned that the time to raise rates is fast approaching.
Markets now see one rate rise priced for 2021 and up to three times more in 2022.
This is a hefty hiking path and many economists and strategists Pound Sterling Live follows don't expect it to be realised, triggering a potential for disappointment.
"I think the market will sell GBP in days leading up to the meeting because there is not one person in the world that expects this Bank of England meeting to deliver an outcome more hawkish than market pricing," says Brent Donnelly at Spectra Markets.
NatWest are however not inclined to actively bet against the Pound, observing some of those attractive characteristics that have been present for much of 2021 still remain.
Robson says last week’s PMIs were seen to be encouraging as the economy looked set to grow faster than markets had anticipated in October.
The Markit/CIPS Manufacturing PMI for October read at 57.7, up on the consensus expectation for 55.8 and the previous month's 57.1.
Chris Williamson, Chief Business Economist at IHS Markit says the flash PMI data is above the pre-pandemic survey average of 54.0 and indicative of roughly 0.7% quarter-on-quarter GDP growth.
"It looks like the expansion is continuing in a fairly healthy fashion, at least in the UK and US. That should allow the Bank of England and the Fed to go ahead and withdraw some of their monetary stimulus," says Marshall Gittler, Marshall Gittler, Head of Investment Research at BDSwiss Holding Ltd.
But Gittler acknowledges there is a risk for Sterling exchange rates that "the recovery is already in the price."
Reiterating a 2021 bet in favour of Pound-Euro upside (via a sell on the EUR/GBP pair) NatWest Markets said in May the outlook for Sterling had brightened and the window for out-performance had been extended a little further.
It turns out that "a little further" in fact extended all the way into October and the call will have paid off.
While the Pound-Euro exchange rate tracked sideways during summer it was on October 20 that a new 2021 high was reached at 1.1872 (EUR/GBP low at 0.8423).
In May Robson said event risk pertaining to Sterling cleared for the first time in 5 years while virus trends were seen as favourable and the economic recovery was expected to be "white hot".
The observations held true into autumn, although there has been a great deal less certainty regarding all of these factors than might have been the case in the spring.