The recent monetary policy decisions made by the Bank of England have sparked significant concerns among institutional investors regarding the potential further depreciation of the British poundWith the announcement that the central bank would lower interest rates, investment firms like Pictet and Hartford Funds have taken proactive measures to lessen their exposure to the poundThis downward adjustment of currency bets reflects a broader sentiment in the market, particularly as firms like RBC BlueBay Asset Management anticipate additional rate cuts by the Bank of England, suggesting a need for further reduction in their pound holdings.

After the Bank of England's announcement on Thursday, the pound experienced a sharp dip of 1.2%, reinforcing its status as the worst-performing currency among the Group of Ten (G10) nations for the yearWhile many analysts foresaw this move, the central bank's concurrent revision of GDP growth forecasts—cutting them by half—caught many off guardThe decision to implement a staggering 50 basis point rate cut received backing from two members of the board, including one previously identified as a hawk, underscoring the profound shift in outlook regarding the UK economy.

The latest adjustments in market pricing underscore the pressing urgency for Chancellor of the Exchequer Rachel Reeves to fulfill promises aimed at accelerating economic growthThis has also dispelled earlier theories that the pound's value would be cushioned by UK interest rates remaining significantly higher than those of many other G10 countries.

Amidst growing expectations of further substantial rate cuts, the prolonged status of the pound as a high-yield currency is now being underminedThis expectation dampens recent optimism surrounding potential trade tensions with the United States, which traders hoped would not materialize.

Current market projections indicate at least two more interest rate cuts this year, with a growing likelihood of a thirdSince the beginning of January, there has been a notable increase in bets on the Bank of England adopting a dovish stance, as initial forecasts by traders suggested only two rate cuts by the year 2025. More dramatically, UBS has projected after Thursday's announcements that there could be up to five cuts by the end of this year.

The implications of further easing will inevitably exacerbate currency depreciation, with ING forecasting the pound to drop against the dollar to 1.19 later this year—a point last observed in March 2023. Additionally, BBVA anticipates significant pressure on the pound against the euro, predicting that 1 euro could rise to exchange for as much as 0.85 poundsNomura has also noted the possible ramifications of rate cuts in the UK juxtaposed with tightening policies in Japan, predicting that the pound could weaken against the yen by as much as 5% by the end of April.

In a recent report, Nomura's foreign exchange strategist, Dominic Bunning, stated, "The latest division in voting may continue to depress government bond yields and amplify the downward pressure on the pound."

Concerns over stagflation are rising amidst these changing dynamics

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Martin Harvey, a partner at Hartford World Bond Fund, commented, "In the short term, the outlook for economic growth appears weak, yet inflation continues to remain elevatedThis combination presents a dire scenario for any currency, further eroding our previously optimistic stance on the pound." Since last year, the fund has progressively reduced its long positions in the poundMeanwhile, BlueBay believes that if inflation leads to another surge in UK bond yields, their long-held short positions on the pound could be adjusted even further.

Kit Juckes, the chief foreign exchange strategist at Societe Generale, succinctly remarked, "Ultimately, we believe the extent of rate cuts will be at least as significant as market expectations, if not more soThus, why should I consider buying the pound at current interest levels?”

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