Deutsche Bank: The pound is losing its sources of support and it’s time to sell

I’ve been writing since the turn of the year that it will be a ‘catch-down’ trade for the pound in 2025 after it mostly kept pace with the US dollar in 2024. It’s been a rough start to the year for GBP as it’s lagged substantially already, including another 100 pip decline today to 1.2211.

Now Deutsche Bank is out with a note saying that it’s time to sell the pound.

Unlike a similar drop in November 2024 after the UK budget, Deutsche Bank believes this decline is not a buying opportunity. They recommend selling the pound against a basket of major currencies (EUR, USD, JPY, and CHF).

Some of the reasons to sell:

• Yield advantage is deteriorating, and vol-adjusted carry is no longer support
• The current account deficit is no longer improving
• Recent currency strength relied heavily on carry trade inflows
• Sterling positioning among leveraged funds is relatively long

Now UK economic data has been weaker than expected and the market pricing for just 47 basis points of easing may be too conservative.

They note that the the trade-weighted sterling index still sitting just over two percent off
its post-Brexit highs but say the most worrisome development is the reversal in correlations with yields.

“The most
concerning portion of the pound’s move came on Wednesday, when sterling went
in the opposite direction of UK yields, as it did in the few days after the UK budget,” DB writes.

This chart makes a compelling case that carry trade inflows have been holding the pound up. Those could reverse quickly if the BOE cuts in February (still at only at 65% chance) and the Bank of England hints at more to come.

DB isn’t publishing FX forecasts just yet but plans to update targets soon. The question is whether they will see a drop below the 2023 lows near 1.2000 and, if so, how close to the 2022 low of 1.0382 it may fall.

This article was written by Adam Button at www.forexlive.com.