Sterling’s rally looks vulnerable as strategists bet selling will resume in coming months

The pound has rebounded more than 10% from last week’s lows against the dollar, but most strategists are sticking to bets that the British currency will resume its losses, with some forecasting a new high by now the end of the year.

Entering its sixth straight day of gains, the pound is set to post its longest rally since April last year, rebounding from last week’s record low of $1.035.

Interventions by the Bank of England to bolster the country’s bond market boosted the pound, but also boosted expectations of higher interest rates in the UK, which Barclays strategists said “could result in a weaker pound down the line”.

Both Standard Chartered and Royal Bank of Canada expect the pound to weaken nearly 10% from current levels by the end of the year, after policy missteps government have undermined confidence in the currency. Nomura Holdings and Morgan Stanley are among those forecasting a slide to parity over the same period.

The pound fell to its current all-time low of $1.035 on September 26, rallying as the UK government backed away from its promise to drop a proposed tax cut. It was trading at $1.138 on Tuesday.

Barclays economists are on the dovish side of market expectations for the Bank of England and expect a terminal rate well below market prices above 3%.

“Given the MPC’s hiking trajectory so far in this cycle, we agree that the risks are for tightening below market prices,” the currency strategists wrote in a research note.

“It would effectively amount to yet another decision to let the currency bear the brunt of adjustment at the cost of higher inflation for longer,” they said.

As a result, they believe the pound is exposed to further downside risks once short-term bearish positions are eliminated, particularly on the euro-pound where the rebound has been most pronounced.

The government’s reversal of its tax cut plans only cuts around £2bn (€2.3bn) out of an overall cut of around £45bn, according to the currency strategist at ING Francesco Pesole, who says this is not a game-changer in terms of the country’s finances and continues to see “a high risk that the UK faces a rating downgrade”.

S&P Global Ratings lowered the UK’s credit outlook from stable to negative last week, citing the country’s fiscal health over the next two years, while Moody’s warned government stimulus measures could cause damage permanent to its public finances. S&P’s next scheduled release of UK sovereign ratings will be on October 21.

• Bloomberg