Standard Chartered’s wealth management division is maintaining a bearish stance on the US dollar for six to twelve months as they sense an important turning point in global currency markets is approaching.

The UK-based, Asia-focused lender meanwhile upgraded its stance on UK equities, saying they are now offering good value and exposure to the commodities complex, which supports their bullish thesis on the pound over the medium term.

Steve Bryce, chief investment officer at Standard Chartered Wealth Management, says there are two opportunities in today’s markets:

“The first is Asian equities without Japan,” he says, adding:

“The second opportunity is UK equities, which we expect to benefit from a relatively higher weighting to dividend-paying securities and sectors, as well as a more attractive valuation compared to the Eurozone and the US.”

These recommendations form part of Standard Chartered Wealth Management’s half-yearly review, which details their investment thesis for the next six months.

“We have also upgraded UK equities to ‘preferred’ given their large exposure to sectors that could benefit from high inflation, such as energy, mining and financial companies,” says Daniel Lam, head of equity strategy at Standard Chartered.

‘The expected outperformance of UK assets, in turn, is likely to provide the pound with further support as global investors look for higher returns.’

Indeed, Manpreet Gill, Head of FICC Strategies at Standard Chartered, says he is taking a bullish stance on several currencies against the dollar over the next six to twelve months, most notably the euro and the pound.

This bullish stance on the pound is based on expectations of “strong growth and employment” as well as the Bank of England’s hawkishness.

However, Standard Chartered warns that there are downside risks to their core view as the pound could remain vulnerable to stagflationary pressures and geopolitical risks.

But the main factor that will ultimately drive the pound’s appreciation against the dollar is the expectation that the dollar will peak in the second half of 2022. (Set up a currency alert here).

This will occur amid a weakening of hawkish expectations for Federal Reserve policy as inflation declines.

World central banks will continue to tighten monetary policy to prevent their own currencies from weakening as it increases inflation.

“Global central banks are following the Fed in tightening policy in an effort to avoid significant currency weakness and even higher inflation. This should ultimately put pressure on the US dollar,” says Gill.

He adds that capital flows should also move out of the US and into more attractive assets such as UK equities.

“The US dollar has already priced in aggressive Fed rate hikes, slowing global growth and significant safe haven risk. The timing of a US dollar reversal is likely to be determined by the speed of policy convergence, China’s economic stimulus as it exits its zero-rate policy and some form of resolution to the war in Ukraine,” says Gill.

Indeed, Standard Chartered maintains a “broadly neutral” view on the dollar in the near term and warns that “sticky” US inflation data could cause the Fed to focus on tightening policy.

In addition, a slowing global economy and financial market constraints could deny global central banks the opportunity to raise rates and reduce the Fed’s backlog, thereby maintaining the dollar’s yield advantage.

Another support for the dollar in the near term is a strengthening risk-reduction sentiment caused by the war in Ukraine and other geopolitical issues, Gill says.