Société Générale (SocGen) analyzes the position of the British Pound (GBP) in relation to the U.S. Dollar (USD) and provides insights into why they expect GBP to be vulnerable once global interest rates have peaked.

Rate Differential: The analysis highlights that when the pound peaked above USD 2 in 2007, UK rates were 3% higher than U.S. ones. When GBP/USD reached 1.32 last month, UK rates were almost 2% above U.S. rates. Interestingly, the rate differential needed to push sterling above USD 1.30 today is far wider than it was just a few years ago.

Resilience of Sterling: Despite the wider rate differential, SocGen anticipates that the pound will remain resilient for the time being, so long as the prospect of monetary policy tightening remains on the table.

Vulnerability Post Peak: The main insight from SocGen's analysis is that once interest rates have peaked in key regions such as the U.S., UK, and Eurozone, sterling is likely to appear quite vulnerable.

Key Points:

1. Wider Rate Differential: The rate differential required to elevate GBP above USD 1.30 is significantly broader today compared to previous years.
2. Temporary Resilience: GBP is expected to be resilient as long as tightening of monetary policy remains a possibility.
3. Anticipated Vulnerability: Once global interest rates have peaked, the pound is likely to become more susceptible to depreciation.

Conclusion: SocGen's analysis underscores the evolving dynamics between GBP and USD, especially with regard to interest rate differentials. While the current landscape may allow the pound to maintain its strength, the analysis suggests that it could face significant vulnerability once the global interest rates reach their peak. This perspective provides a valuable lens for investors and policymakers to consider, especially in the context of monetary policy decisions and currency risk management strategies.