The Economist, the FT, City AM and even Bloomberg, CNBC and others in the foreign press have picked up on this story. And whilst the media circus circles around ‘partygate‘, the 1922 committee, Jubilee celebrations and the weather, this is the story that says so much about the state of Britain right now. The British Pound is now looking more like an emerging market currency, not a respected global currency.
Not on the front pages of the British published media is the fact that the Pound Sterling is in danger of becoming an “emerging market” currency as falling growth and growing risks cause investors to flee the pound.
‘Sick man of the currency world‘ declares Reuters.
As of Tuesday afternoon in Europe, sterling was down 7% against the dollar year-to-date, trading just below $1.26 having been as low as $1.22 earlier this month.
The news is really about the fact that short positions have been mounting against the Pound as the global economic challenges of the war in Ukraine, inflation and supply chain bottlenecks. Slowing growth is one thing – the fallout from Brexitmakes everything so much worse against its peers.
In a research note Monday, BofA Senior G-10 FX Strategist Kamal Sharma said further weakness can be expected in the pound through the rest of 2022.
He also dismissed comparisons between the monetary tightening paths of the U.S. Federal Reserve and the Bank of England, arguing that the reaction functions of the two central banks are different. Sharma said:
“The challenges facing the BoE are unique along with a supply dynamic that it remains wholly unwilling to discuss: Brexit. This has resulted in a confusing communication strategy: hiking rates against a sharply slowing economy is never a good look for any currency.”
“An alleviation of the current risk-off environment and fiscal stimulus may provide some relief but the damage has been done and the outlook for GBP looks grim.”
The preferred means of capitalizing on sterling’s “epic” fall from grace for BofA is through the advance of the euro against the pound, Sharma added.
This was echoed on Tuesday by George Saravelos, Deutsche Bank’s global co-head of FX research, who said that greater optimism about European growth, as well as the “non-linear” effects of the European Central Bank returning to positive rates, meant the euro is poised to outperform both the dollar and the pound.
The U.K. economy shrank by 0.1% in March and economists are expecting further contractions this year, as the country’s cost-of-living crisis entrenches itself. Inflation jumped out to an annual 9% in April as food and energy prices spiralled.
Parallels to the 70s
The Bank of England is expected to continue raising interest rates to rein in inflation after a fourth consecutive hike took its base rate to a 13-year high of 1% early in May. The Bank sees inflation to rise to roughly 10% this year as a result of the Russia-Ukraine war and persistent lockdowns in China.
“Imbalances are rising and where the spectre of Brexit still looms large on the domestic political scene”
Bank of America strategists are increasingly sceptical that the Bank’s defence mechanism can rescue the pound, however.
“Though not our central scenario, we think sterling finds itself in an increasingly invidious position, where central bank communication has been increasingly challenging; where imbalances are rising and where the spectre of Brexit still looms large on the domestic political scene,” Sharma said.
“Investors are increasingly discussing GBP as taking on emerging market characteristics whilst parallels to the 1970′s resonate as being one of the worst post-war decades for the UK.”
He added that the Wall Street giant is concerned that the “increasing politicization” of U.K. policy undermines the pound in ways that “would appear EM-like,” suggesting investors begin hedging for the British Pound to lose its status as a respected global currency.
The European Financial Review is the leading financial intelligence magazine read widely by financial experts and the wider business community.