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BoE change may see Sterling fall again

Tuesday, March 19 14:12:48

Sterling is set to resume its fall against the dollar, options market prices indicate, with a possible change in the Bank of England's policy remit in this week's British budget likely to hasten a drop to four-year lows.

Britain's pound is the worst performing major currency after the yen this year, coming under relentless selling pressure. It has lost 7 percent against the dollar and 5.5 percent versus the euro on risks of a triple-dip recession in Britain and prospects of further monetary easing.

Investor demand for options betting on the pound rising or falling against the dollar, as measured by the one-month risk reversals, shows the strongest preference for sterling weakness since last July.

"The risk reversals are pointing at more bearishness for sterling/dollar," said Olivier Korber, an options strategist at Societe Generale. "Lower growth forecasts would prompt the BoE to ease monetary policy."

Traders cite steady demand from hedge funds for options that would make money if sterling fell to $1.45 within three months. Most banks' have their year-end forecasts even lower.

True, sterling has picked up slightly since hitting a 33-month low of $1.4832 last week. Traders cite some demand for one-week options that bet the pound will rise to $1.53 from a few investors, from around $1.5120 on Tuesday.

But analysts say that with Britain struggling with near- zero growth and facing more spending cuts, any such gains would be fleeting and an opportunity to sell the pound.

Against this gloomy background, sterling is expected to lag currencies of countries whose economies are recovering, such as the United States.

Under pressure to kick-start the UK economy, speculation is swirling that Finance Minister George Osborne will announce with Wednesday's budget a review of the central bank's remit to give it more leeway on inflation targeting. That will allow the BoE more scope for further easing despite higher inflation.

"With the UK government set to announce a review, the risks are rising again that sterling depreciates further this year especially against the dollar," said Mansoor Mohiuddin, head of FX strategy at UBS. He has a year-end forecast for $1.41, a level last seen in March 2009 and not far from a $1.35 low struck during the global financial crisis. Reuters