BlueBay’s Pound U-Turn Signals U.K. Post-Brexit Pain Starts Now

The risks to the pound’s 2021 recovery may be becoming too numerous to bear as Britain’s currency looks poised to end a five-month winning streak.

Everything from waning euphoria over the nation’s vaccine-rollout program to renewed worries about the state of the post-Brexit economy and a squeeze on public finances are taking the wind out of a rally that’s made sterling the biggest gainer this year among the G-10 currencies after the Canadian dollar. It’s slipped more than 1% in March so far, on track to interrupt an advance since September that drove it to its strongest level in almost three years.

“Too much optimism may be in the price,” said London-based Mark Dowding, who this month reopened bets against the pound at BlueBay Asset Management LLP, where he oversees $70 billion. “The lockdown in the U.K. remains more restrictive than elsewhere,” putting the shackles on growth.

The pessimism underscores the mounting difficulties faced by Prime Minister Boris Johnson. Questions over Britain’s future following its break last year from the European Union are taking center stage again, even during one of the world’s most successful Covid-19 inoculation campaigns. Trade data showed EU shipments collapsed in January. The budget deficit is set to hit about 15% of GDP this fiscal year, the highest since the Second World War.

BlueBay’s Pound U-Turn Signals U.K. Post-Brexit Pain Starts Now

For Dowding, that means sterling may retreat more than 5% to $1.30 in the next three months, a level last seen in November -- when markets were being rattled by doubts over whether a Brexit deal could be reached. The chances of the currency touching that level by year-end are almost 50%, according to Bloomberg probability calculations based on a combination of options and forecasts. Sterling slipped as much as 0.2% to $1.3757 on Monday.

Some of the shine is already starting to fade. Data from the Chicago-based Commodity Futures Trading Commission in Washington show investors have started to trim bullish bets on the pound. After their long positions hit a one-year high earlier in March, leveraged funds scaled back their wagers for a third-straight week.

Even with a Brexit deal and an agreement on financial regulation out of the way, the U.K.’s departure from the EU has ushered in a fresh series of risks, including tension on the Irish border and a possible referendum on Scottish independence.

Brexit will bring “a slowdown in potential growth, so from a longer-term perspective we would expect sterling to resume its downward trend,” said Seema Shah, the chief strategist at Principal Global Investors in London who sees the pound retreating to $1.30 as early as the third quarter. “Once this vaccine rollout is done and other countries have caught up, and the U.K. no longer looks like a shining light, we’re back to where we were.”

Some 47% of the U.K. population had received at least one dose of vaccine as of March 25, compared with 41% in the U.S. and just 14% in Germany, according to data collected by Bloomberg News and Johns Hopkins University. Britain now expects to receive the first doses of the U.S.-made Moderna Inc. vaccine within weeks, Culture Secretary Oliver Dowden said on Sunday.

Vaccination success has helped stoke optimism the country’s early reopening and a services-led recovery could put it ahead of its peers. The median of analysts’ forecasts compiled by Bloomberg is for the pound to end June at $1.39, compared with $1.35 in early January.

BlueBay’s Pound U-Turn Signals U.K. Post-Brexit Pain Starts Now

“Negative sentiment toward the pound is gone,” said John Roe, the London-based head of multi-asset funds at Legal & General Investment Management, which turned neutral on the pound-dollar after closing its short positions on Feb. 25. “The U.K. is much less prone to a Covid-related relapse.”

Bank of England Chief Economist Andy Haldane said last week there could be a “rip-roaring” recovery even if consumers spend only a small proportion of savings accumulated during lockdown. Consumers did return to online and in-store shopping in February after a slump at the beginning of the year, official figures published Friday showed. Still, the rebound was modest.

Phil Rush, at research firm Heteronomics, a Malvern, England-based financial research firm, isn’t convinced about such a recovery. He says savings have been accumulated by households least likely to spend them, and there’s no sign of any likely spending splurge.

”The longer-term picture is far less positive” for the pound, said Antony Foster, head of G-10 spot trading at Nomura International Plc in London. “We all know the public finances are in dire straits. There are a lot of little bad things in the background that individually have the potential to be pretty systemic. Add them all together and it’s just not a great picture.”

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