According to Bank of America, investors are abandoning the British pound due to growing risks and declining growth, which puts it in danger of becoming an ‘emerging market’ currency. Sterling had declined almost 7% against the US dollar in a year in Europe, as of Tuesday afternoon. The currency was trading at a value of $1.26. Earlier this month, the pound had gone as low as $1.22. The British currency has seen short positions increasing against it, as domestic risks like Brexit and the unique predicament of the Bank of England (BoE) are finally taking their toll.
Likewise, global economic challenges have also had an impact, which includes bottlenecks in the supply chain, rising inflation numbers, slowing economic growth, and the Russian invasion of Ukraine. Currency analysts have predicted that the pound is likely to continue its declining trend throughout the year. People had been comparing the monetary policy tightening measures of the US Federal Reserve and the Bank of England. However, experts have said that these comparisons are not accurate because the two central banks do not have the same reaction function. Currency analysts state that the Bank of England is facing some unique challenges and it is just unwilling to discuss Brexit that has impacted its supply dynamic.
This has created a great deal of confusion and no currency will ever benefit if interest rates go up and the economy slows down. Some fiscal stimulus and an improvement in risk sentiment may help for a bit, but not by much as the damage has already been done. Things certainly don’t look good for the British pound. If things continue this way, it is likely that the euro is going to strengthen against the pound. There is a great deal of optimism surrounding growth in Europe and if the European Central Bank (ECB) decides to return to positive interest rates, then it is likely that the euro will beat both the US dollar and GDP.
UK inflows had already been going sideways when the ECB decided to turn the interest rates negative. This saw even more inflows in the UK. With the dynamic changing, the euro-sterling is expected to go higher significantly. As of Tuesday afternoon, the euro was trading at a value of 0.85 against the British pound but is expected to go to 90 by 2023. March saw a 0.1% decline in the UK economy and economists believe it is going to contract even further. With spiraling prices of energy and food, inflation in the UK reached an annual rate of 9%.
Recent years have seen the Net International Investment Position of the United Kingdom deteriorate because a large stock of assets is held by foreign investors. This has also affected the pound’s recovering ability. The NIIP is used for gauging the creditworthiness of a company and the fact that more UK assets are held by foreign parties will have a negative impact on its income balance. As opposed to 2021, UK assets have only gotten costlier.