The British pound continued to fall this week, diverging from the path of UK yields. Deutsche Bank (ETR:) recommends selling the pound on a broad, trade-weighted basis.
The bank noted that the pound was the worst-performing currency since the start of the year, recording a sharp decline similar to that seen after the announcement of the UK budget in early November.
Analysis by Deutsche Bank found that the UK’s current account deficit is unlikely to improve, and the rise in volatility-adjusted yields is at risk of further deterioration. The report also noted that the pound has become increasingly reliant on inflows, which are now at risk.
After taking profits on their long sterling positions in mid-December, Deutsche Bank strategists changed their view and recommended selling.
The report provided further context, noting that the pound has fallen just over 1% on a trade-weighted basis since the start of the year. While historically this decline is not considered large, the pound’s recent performance against the strengthening US dollar has been notably weak, with only a handful of currencies not hitting multi-month or multi-year lows against the USD.
Deutsche Bank’s recommendation comes after observing that the pound moved in the opposite direction to UK yields on Wednesday, reminiscent of the pattern seen after the UK budget announcement.
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