The British pound has continued to move lower this week, diverging from the trajectory of UK yields. Deutsche Bank (ETR:DBKGn) recommends selling the pound based on a broad, trade-weighted basis.
The bank noted that the pound has been the worst-performing currency since the beginning of the year, marking a sharp decline similar to the one observed after the UK budget announcement in early November.
Deutsche Bank's analysis indicated that the current account deficit in the UK is likely not improving, and the volatility-adjusted yield pickup is at risk of further deterioration. The report also pointed out that the pound had been increasingly reliant on carry inflows, which are now in jeopardy.
After having taken profits on their long positions on the pound in mid-December, Deutsche Bank's strategists have shifted their stance to recommend selling.
The report provided additional context, stating that the pound is down just over 1% on a trade-weighted basis since the start of the year. While historically this decrease is not considered large, the pound's recent performance against the strengthening US dollar has been notably weak, with only a few currencies not at multi-month or multi-year lows against the USD.
Deutsche Bank's recommendation comes after observing that on Wednesday, the pound moved in the opposite direction to UK yields, reminiscent of the pattern seen following the UK budget release.
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