UniCredit Sees 10% Pound Drop in Contrarian Bet on More BOE Cuts

(Bloomberg) -- The pound will slide around 10% against the euro by the end of next year as the Bank of England is likely to cut interest rates faster than markets are expecting, according to UniCredit SpA.

The Italian bank’s investment institute is forecasting a fall in the pound to 0.95 per euro by end-2026, from around 0.86 at the moment. It’s by far the most bearish call for sterling among analysts surveyed by Bloomberg, where the median forecast is for the UK currency to stay around current levels.

Roberto Mialich, senior global currency strategist at UniCredit in Milan, expects the BOE to cut again in November and believes investors will “aggressively reprice more easing” next year. That’s based on the view that an eventual weakening in the UK labor market will hurt consumer spending and drive inflation into retreat.

It’s a strongly contrarian call given that markets are pricing less than a 50% possibility of any more moves this year, and less than two cuts by end-2026. What’s more, the latest consumer-price figures on Wednesday showed inflation at nearly double the central bank’s target, while the jobs market appears to be in better shape than many economists expected. Mialich is sticking to his guns.

“We remain convinced that they will probably continue to move on a quarterly basis,” Mialich said in an interview. “If we are right, clearly this will have a more negative impact on sterling.”

The pound is among the top-performing Group-of-10 currencies this month, bolstered by the view that the BOE will be cautious in cutting rates and by a sagging dollar. UniCredit expects that trend to reverse with sterling hitting $1.28 in 2026, down around 5% from current levels of $1.35.

Asset managers have been building up bets against the pound following its rally, while hedge funds and other leveraged investors have been shedding wagers on further gains, according to the latest weekly IMM data. Options markets and technical indicators have also turned more negative this week.

UniCredit sees the UK heading toward a sharp slowdown at a time when the government has little leeway to spend to boost the economy, which could leave the BOE doing much of the legwork to help growth through lower rates. It expects rates to drop to 2.75% by end-2026, versus market pricing for 3.60%.

“Our economists are much more worried about the UK, especially the labor market,” he said, adding there is a risk the government will be forced into significantly greater borrowing.

Still, a drop in the pound to 0.95 per euro would be a crisis-type level only breached twice since the birth of the common currency: during the 2008 global financial crisis and after the Covid pandemic broke in 2020. Even in the aftermath of the 2016 Brexit vote, it fell just short.

Mialich concedes that such a level “has proven to be a challenging target in the past,” while arguing that his call was “not impossible.”

More stories like this are available on bloomberg.com

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