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Investing.com - Deutsche Bank (ETR:DBKGn) has adjusted its outlook for the British pound following the Bank of England’s recent hawkish monetary policy meeting. The bank noted that sterling’s positive reaction aligns with its historical pattern of rallying during cutting cycles, contrasting with its tendency to weaken on decision days during hiking cycles.
The currency’s short-term strength reflects the unexpected voting pattern at the meeting, where more members voted to hold rates than analysts had predicted, with four votes for holding versus one for a 50 basis point cut. Deutsche Bank also highlighted the Monetary Policy Committee’s surprising projection of less spare capacity in the economy compared to May, despite recent increases in the unemployment rate.
Deutsche Bank suggests that further sterling appreciation against the euro would likely stem from unwinding of short positions rather than fundamental changes in medium-term drivers. While uncertainty around a November rate cut has increased, the bank has merely pushed its terminal rate projection later into 2026 rather than raising it from the previous 3.25% forecast.
The bank maintains that fiscal risks remain a concern for sterling, both from domestic UK factors and the gilt market’s sensitivity to U.S. market selloffs. Deutsche Bank observes that the foreign exchange market has begun pricing in these risks, as evidenced by the gap between EUR/GBP levels and front-end rate differentials.
While the hawkish meeting has triggered short-term position reduction in sterling, Deutsche Bank indicates it has raised the threshold for EUR/GBP to significantly exceed their year-end forecast of 0.87. The bank’s short recommendation for GBP and NZD against Scandinavian currencies remains active.
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