BOE’s Sentance seemed to talk down the pound today, saying “There does not appear to be much evidence to support a quick and sustained unwinding of the recent decline.” He also noted that the weak pound should make UK exports more competitive, but added that it could also boost inflation.  Cable has had trouble breaking back above 2.0, and comments like this won’t help.  We think the market remains fundamentally bearish on sterling, and near-term, a break of 1.9760 targets a retest of the April low of 1.96.  The 2008 low of 1.9340 is likely to be tested in Q2 or Q3, and we have a year-end target of 1.87.  Given continued ECB hawkishness, EUR/GBP is likely to record new highs in the coming months until the ECB easing cycle comes within view.

It’s really quite noteworthy when a central banker says anything remotely negative about their currency, and Sentance should study ECB officials on how to talk more like a central banker.  Sentance also said the pound’s drop probably reflects investor perceptions that UK interest rates will fall “significantly” and may also be due to fears that GBP-denominated assets are riskier.  While Sentance was one of two dissenters at the last meeting to vote for steady rates, the other seven that voted to cut (one voted for 50 bp) probably aren’t going to change their view in the coming months as the economy softens.  BOE next meets May 8, and market is looking for no cut then.  Looking further out, Bloomberg survey shows that the market is looking for a 25 bp cut in Q2, a 25 bp cut in H2, a 25 bp cut in Q1 09, and a 25 cut in Q2 09 that would take the base rate to 4.0%.