Banks Sour on UK Currency Over Economic Risks From Spending Cuts

(Bloomberg) — Big banks are turning more pessimistic on the pound (6B=F) before the UK unveils its fiscal plan for the coming year, saying the risk of spending cuts and weaker economic growth forecasts dampens the currency’s appeal.

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JPMorgan Chase & Co. (JPM) and Banco Bilbao Vizcaya Argentaria SA (BBVA) are among the firms recommending investors buy the euro and sell sterling ahead of Wednesday’s UK Spring Statement. They forecast the pound will fall to 85 pence per euro, the lowest since August, by the end of the next quarter.

UK Chancellor of the Exchequer Rachel Reeves is expected to announce cuts to public spending and more borrowing to meet her self-imposed fiscal rules. That, along with possibly weaker economic growth forecasts from the Office for Budget Responsibility, could support bets on further interest-rate cuts from the Bank of England and weigh on the pound’s appeal.

“This will help to push the pound lower as there won’t be any positive surprises in the statement,” said Roberto Cobo Garcia, head of G-10 FX strategy at BBVA, who sees a risk of the euro-pound pair rising toward 0.8470 in the short term.

The gloomier outlook for the UK economy contrasts with hopes of stronger euro-area activity in coming years after Germany approved a historic plan to invest hundreds of billions of euros in defense and infrastructure. The pound is down more than 1% versus the common currency this month, headed for its biggest loss since October.

“To the extent that UK fiscal concerns persist alongside spending cuts and growth disappointment, we think a weaker pound will be the main release valve,” said Erik Nelson, a macro strategist at Wells Fargo (WFC).

These concerns could trigger a reversal in bets for a stronger pound versus the dollar, which have climbed to their highest since mid-November, according to the latest Commodity Futures Trading Commission positioning data. Sterling is up 3% against the greenback this month as the US currency weakened broadly on fears about a US economic slowdown.

Kit Juckes, head of FX strategy at Societe Generale SA (GLE.PA), said investors’ positioning on the currency “sits uncomfortably with the parlous state of the UK’s public finances.” He thinks the currency will fall against the euro as markets trim those bets.