The Bank of England indicates economic growth risks, institutions increase shorting of the pound.

After the latest policy decision by the Bank of England solidified investors' concerns about a slowdown in the UK economy, institutional investors are preparing for further weakness in the British pound. Since the beginning of the year, Pictet Asset Management Ltd. has significantly reduced its bets on the pound. Hartford Funds and Russell Investments are also reducing their holdings of the pound, while RBC BlueBay Asset Management believes that with market expectations of further interest rate cuts by the Bank of England this year, there is further room to reduce their already reduced position. After the Bank of England announced a rate cut on Thursday, the pound fell by 1.2%, maintaining its position as the worst-performing currency among the G10 currencies this year. Although this decision was expected, the Bank of England halved its economic growth forecast for this year in an accompanying prediction, with two board members - including a former hawkish member - voting in favor of a significant 50 basis point rate cut. Shaniel Ramjee, portfolio manager at Pictet, said, "Long-term, it is difficult to see demand for the pound given the current fiscal and economic growth conditions in the UK. We still believe there are risks to the economy, and the Bank of England needs to further cut interest rates." He has reduced his exposure to the pound to the lowest level required for his portfolio since the beginning of the year. The latest price adjustments highlight the urgency of Chancellor Rachel Reeves to deliver on promises of accelerated economic growth. This also refutes the view over the past two years that boosted the pound: that UK interest rates would remain far higher than many other G10 countries. The likelihood of a significant interest rate cut is increasing, which is weakening the pound's long-standing position as a high-yield currency. This has also dampened the recent rise in the pound, as fears emerge that the UK may face serious trade tariffs from US President Trump. Market pricing indicates there will be two more rate cuts this year, with a growing likelihood of a third rate cut. Since the beginning of January, bets on loose Bank of England policies have significantly increased, with traders believing there may only be two rate cuts by 2025. More aggressively, UBS predicts that there could be five rate cuts before the end of the year following Thursday's decision. More loose policies will more currency weakness, with ING forecasting that the pound against the dollar will fall to 1.19 later this year, the lowest level since March 2023. BBVA predicts that the pound against the euro will be affected, with 1 euro possibly rising to 0.85 pounds. Nomura Holdings points out that considering the interest rate differentials from the UK's rate cuts and Japan's tight policies, the pound against the yen could fall by 5% to 180 by the end of April. Dominic Bunning, a currency strategist at Nomura, wrote in a report that the latest voting discord "may continue to weigh on bond yields and increase downward pressure on the pound." Stagflation concerns Even Bank of England Governor Bailey's remarks about the voting results not indicating a dovish stance have not helped the pound. Some investors believe that his position indicates he is concerned about the country falling into stagflation, as despite slowing economic growth, inflation remains stubbornly high. Martin Harvey, partner at Hartford World Bond Fund, said, "At least in the short term, the economic growth outlook appears soft, but inflation remains high. For a currency, this is a bad combination and has undermined our positive view on the pound last year." The fund has been reducing its long pound positions since last year. Meanwhile, BlueBay believes that if inflation causes UK bond yields to soar again, there is further room to increase their long-held short pound positions. Kit Juckes, Chief FX Strategist at the French Industrial Bank, said, "In the end, our rate cut could be at least as big as people imagine, if not more. So why should I buy pounds at current interest rates?"