Analysts at Bank of America Merrill Lynch have told clients they are forecasting a weaker pound as we move through November.
Driving this forecast are two unsurprising factors: The Bank of England and economic news releases.
We look at both factors as they related to the forecast for a potentially weaker British pound.
The Bank of England:
Central bank policy continues to be a key driver for global exchange rates; and no less the pound sterling exchange rates.
There are two key BoE events currency markets will be watching - the monthly interest rate decision on the 7th of November and the Quarterly Inflation Report on the 13th of November.
The former is expected to be a non-event by pretty much every commentator out there.
It is the latter that offers the potential for fireworks though.
Nick Bate at Bank of America says:
"The near-term outlook for sterling will likely be driven by leading indicators (manufacturing and service sector PMIs) alongside the Quarterly Inflation Report.
In this context, risks for sterling are gradually increasing to the downside.
Bates says:
"After five months, UK PMI data is no longer surprisingly higher. Further, a stronger sterling, higher yields, lower oil and commodity prices (since the August Inflation Report) all suggest dampening pressures on inflation which could be negative for the currency.
"Finally, we continue to monitor the performance of UK equities closely. After a strong performance over the summer, investors are now positioned overweight UK equities – any correction here would weigh on the currency."
Indeed, BofAML OCTAVE (systematic trading model) already warns that the UK now has the worst relative equity market performance across the G10, boding negatively for sterling and posing upside risks for EUR/GBP over the near-term.
There is one thing worth noting about these forecasts for the pound euro exchange rate: They don't take into account the euro side of the equation.
Look at today's massive slump in the euro exchange rates and you get a sense that November will prove bumpy for the euro too.
Either way, an interesting month awaits us!
