Economists were being optimistic just six months ago. They mistakenly thought that inflationary pressures would be ‘transitional,’ would peak by the year-end and fall back quite quickly. How wrong there were. Now we have another indicator – the pound sterling.
Irrespective of the small increases in economic activity such as the Jubillee weekend and the summer holidays, the fundamentals – those things that tell us what’s really going on are not looking good at all.
One of those indicators is faith in the currency of a country.
The FT reports this morning that – A duo of Wall Street banks is warning on the “grim” outlook for the pound, predicting that stubbornly high inflation and an economic slowdown will precipitate further declines for the UK currency. The pound has lost ground against most key rivals this year, despite four UK interest rate rises since December as the Bank of England began the process of tightening monetary policy ahead of other major central banks.
The rot started with Brexit when Sterling collapsed from $1.50 to $1.29 in the space of two days from the day the EU referendum result was announced. Last week, it was trading at $1.23.
Investors have been growing increasingly concerned about the UK’s cost of living crisis, which the BoE cautioned could push the UK into recession later in 2022.
Sterling has steadied a little as the gains made by the USD have retreated somewhat recently as a broad dollar rally goes into reverse, but remains close to the lowest against a basket of currencies of the UK’s trading partners.
A recent investor survey by Bank of America showed the sharpest one-month drop in sentiment towards sterling – “Sterling’s fall from grace has been epic given last year’s euphoria (by exiting the global pandemic early) and in many ways has caught the investor community by surprise,” said Kamal Sharma, a currency strategist at Bank of America. “Hiking rates against a sharply slowing economy is never a good look for any currency.”
Pressure on sterling could increase if the UK follows through on its threat to rip up the post-Brexit trade deal for Northern Ireland. If the government does proceed, there’s a chance the pound Sterling could reach parity with the US dollar, which would make experts cheap – but would effectively create much higher inflationary pressures.