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Deutsche lifts sterling forecasts but still sees pound as ‘toxic’

With the pound is on track for its best week since Theresa May called the general election in April, the famously bearish folks at Deutsche Bank have reluctantly lifted their forecasts for sterling against the dollar.

But don’t imagine they’ve completely changed their minds about the “uniquely toxic” currency…

Bank of England governor Mark Carney’s comments that “some removal of monetary stimulus is likely to become necessary” if UK economic conditions improve helped sterling to rally almost 2 per cent this week.

In a note to investors on Friday, Deutsche analysts Oliver Harvey and Mark Wall said the BoE appears to be “becoming increasingly intolerant about sterling weakness”, as data increasingly show that the costs of the weak currency – namely falling real wages – are outweighing any minor benefits.

Deutsche admits the BoE’s “reluctance to tolerate further sterling weakness will prove an obstacle to our bearish FX forecasts”, but stressed that “neither is it enough to turn bullish”.

Mr Harvey and Mr Wall say Brexit uncertainty and weak consumer spending means “the Bank is likely to lag rather than lead global hawkishness” as “the likely outcome from a sharp hiking cycle would be to tip the economy into recession”.

They now think the $1.21 level hit in February will mark the pound’s lowest point, and expect it to end the year near its current levels at around $1.29.

However, the shift is largely a result of changes to Deutsche’s dollar forecasts announced earlier this week. In euro terms, the German bank still thinks sterling has a way to go, predicting a further 10 per cent depreciation over the next two years.