Momentum and historical precedent set by previous bouts of Pound Sterling weakness have Bank of America nervous that their official forecasts for the currency are far too optimistic.

Pound to Dollar exchange rate today (14-10-16) = 1.2213, Pound to Euro exchange rate today: 1.1088

3 events that will determine Sterling direction over three months
Data doesn’t matter anymore
Peak-to-trough move 18% of the way through relative to 1975; 63% versus 1992 and 33% versus 2008.

The Pound has underperformed all other major currencies over the past month having at one point plunged below $1.15 for the first time since 1985.

It also fell briefly under €1.10.

The October decline was triggered by confirmation that the UK will go ahead and start the EU withdrawal in March 2017 and market perceptions of an increased risk of a so called hard-Brexit.

With no one really knowing what a hard-Brexit looks like layers of uncertainty remain, providing the perfect vacuum within which Sterling can fall yet further.

New research on the Pound by Bank of America Merrill Lynch Global Research suggests Sterling price-action will be dominated by three main events in the coming months.

The first is the Bank of England Quarterly Inflation Report (3rd November), the second is the Autumn Statement (23rd November) and the third is the timing of the triggering of Article 50 (sometime in 1Q 2017).

The first two events are relatively known quantities whereas the third is less so, and analysts Robert Wood, Kamal Sharma, Sebastien Cross and Mark Capleton think this will pose the greatest risks to the Pound owing to the uncertainty it poses to much-needed foreign investment flows to the UK.

Current Account Deficit and Investor Inflows: The Pound's Achilles Heal
If you read a piece of institutional research on Sterling these days its not long before the topic of the UK’s gaping current account deficit is brought up.

The current account is the UK’s bank balance with the rest of the world - it is currently in deficit which suggests we pay out more than we bring in.

At present the current account deficit is at historical highs confirming a reliance on foreign imports and declining receipts from foreign investments.

Current account deficit

Because we import more than we export logic dictates that the currency should fall we sell more Sterling to buy the foreign currency to fund our reliance on imports.

But, Sterling remains elevated above the fair value implied by the current account thanks to strong inflows from foreign investors, keen to invest in the UK.

UniCredit’s Erik Nielsen points out that we must rely on about £10BN a month of foreign inflows to keep Sterling stable.

It is this inflow that has allowed funded our ability to stock supermarket shelves with cheap Marmite.

What would happen to Sterling if that inflow were to dry up?

“The UK’s current account deficit makes the economy vulnerable to actions and words that could undermine the ‘kindness of strangers’, in Mark Carney’s language, who fund the UK deficit,” say Bank of America.

Bank of England Deputy Governor Ben Broadbent argued this week, the credibility of the UK’s institutions has helped keep current account deficits sustainable in the past.

“Undermine that credibility, and sustainable could turn to unsustainable. That is probably one lesson of recent days,” say Bank of America.

Analysts at UBS believe the Pound could actually par the Euro owing to the current account deficit.

Ignore the Data
We saw Sterling snap its post-referendum decline in July thanks to better-than-anticipated data.

However, it is argued this support will be in short supply going forward as the Brexit process casts uncertainty over the UK's future economic landscape.

“That is why we have been, and remain, pessimistic about the economic outlook,” say Bank of America.

The team doubt that the improvement in UK data will: a) continue and; b) provide support for the Pound.

It is believed the UK rates market will consequently be reluctant to react to any good news on the economy and the correlation between GBP and UK data surprises will remain weak:

Greatest risks to the Pound

Furthermore, it is argued that the announcement of a triggering of article 50 and a hard Brexit will almost make the recent improvement in data redundant as the macro parameters have now changed and the risks are that data deteriorate once more.

The Pound’s Decline is in its Infancy
An interesting clue on the likely direction of the Pound can be found in previous bouts of weakness.

The initial sell-off in GBP/USD following the EU Referendum was immediate and
resembled the price action in 1992 when the Pound was ejected from the Exchange Rate Mechanism (ERM).

If that pace of depreciation had been sustained, Bank of America note that GBP/USD would have been comfortably trading below 1.20 by now.

Such a decline has however been avoided as the improvement in UK data (relative to analysts’ overly bearish expectations) has seen GBP/USD stabilise ...

The governor of the Bank of England made clear that sterling's fall "helps the economy adjust".
However, he said it was "going to get difficult [for those on the lowest incomes] as we move from no inflation to some inflation".
He said that food would be the first to experience price rises.
More broadly, Mr Carney said goods and services would see higher inflation over the next "few years".
"It will show up," he said.
Mr Carney, who was speaking at a public roundtable with charities and other third sector organisations in Nottingham, said it was not the Bank's job to target the value of sterling but that "we are not indifferent to it, it matters to the conduct of monetary policy".
He said the Bank had to "weigh increased inflation against supporting the economy" with low interest rates.
The pound recovered most of the days losses against the dollar following his comments.
Yields on 10-year UK government bonds rose more than 10 basis points to 1.149% - their highest level since the Brexit vote - as investors bet the currency's recent falls would send inflation higher.
Mark Carney
A week after Theresa May questioned at the impact of the Bank's quantitative easing policies, Mr Carney also said that Threadneedle Street would not be told what to do by politicians.
He said it made the Bank's job more difficult when politicians commented on its policies, rather than its objectives.
"We are not going to take instruction on our policies from the political side," the governor added.
Protecting jobs
Earlier, Mr Carney said that the Bank of England was willing to see an "overshoot" of its 2% inflation target if it meant supporting economic growth and protecting jobs.
Between 400,000 and 500,000 jobs could have been at risk if the Bank had not taken action after the referendum, he said.
"We are willing to tolerate a bit of an overshoot [on inflation] to avoid unnecessary unemployment. We moved interest rates down to support the economy."
The Bank cut interest rates and provided more monetary stimulus in August after the vote to leave the European Union.
Mr Carney said long-term economic prosperity could not be guaranteed by the Bank: "We can mess it up, we can't make it. We provide the foundations, not the end."
Inequality
With the fall in the value of sterling, some economists now predict that inflation will hit 3% by the end of next year as imports of products such as food and fuel become more expensive.
On the issue of inequality, Mr Carney said: "We care a lot about distribution, but we are not a political entity."
He said many people were still "scarred" by the financial crisis.
But he argued it was for the government to decide on policies to tackle issues such as globalisation, technological change and skills education.