Sterling is taking on ’emerging market’ characteristics: Bank of America

A trader pauses while checking financial data on a computer screen at ETX Capital, a CFD broker in London, England, Friday, Oct. 7, 2016.

Chris Ratcliffe | Bloomberg | Getty Images

London – GBP The pound is in danger of becoming an ’emerging market’ currency as investors flee the pound, according to reports Bank of America.

In Europe by Tuesday afternoon, the pound was down 7% against the dollar. Dollar Year-to-date, it is trading just below $1.26, having traded as low as $1.22 earlier this month.

Short positions have been increasing Global economic challenges due to Ukraine war, inflation, supply chain bottlenecks and slowing growth converge with domestic risks from the euro area Bank of EnglandThe unique dilemma and consequences of Brexit.

Bank of America senior G-10 currency strategist Kamal Sharma said in a research note on Monday that the pound is expected to weaken further through the rest of 2022.

He also dismissed comparisons between countries’ monetary tightening paths. Fed and the Bank of England, arguing that the two central banks respond differently.

“The BoE’s challenge is unique, and a supply dynamic it remains completely reluctant to discuss: Brexit. This leads to a confusing communication strategy: raising interest rates against any currency in the face of a sharp economic slowdown Neither was a good choice,” Sharma said.

“The current risk-off environment and easing of fiscal stimulus may provide some relief, but the damage has been done and the outlook for sterling looks grim.”

For Bank of America, preferred way to capitalize on sterling’s ‘epic’ fall from favour is by pushing EUR Sharma added against the pound.

George Saravelos echoed this on Tuesday, Deutsche BankGreater optimism about European growth and the “non-linear” impact of the ECB’s return to positive rates means the euro is poised to outperform the dollar and sterling, he told CNBC.

“If you look at the inflows to the UK, they’re moving sideways, and once the ECB goes negative, you’ll see a big acceleration in the inflows into the UK – for example buying UK gilts,” Saravelos said .

“With this dynamic changing and the Bank of England closer to stagnant – a reluctant tightening, so to speak – you should see EUR/GBP move significantly higher. We expect it to surpass sterling by next year. 90p.”

The euro was trading just above £0.85 as of Tuesday afternoon.

This UK economy shrinks 0.1% in March Economists expect a further contraction this year as the country’s cost of living crisis is entrenched. Inflation jumped to 9 percent a year in April as food and energy prices spiraled.

Similar to the 70’s

At the heart of the gloomy outlook for the pound, Sharma noted, is the deterioration in the UK’s net international investment position in recent years, as foreign investors hold large amounts of UK assets.

The NIIP measures the difference between UK claims on non-resident assets and foreign claims on UK residents, an important measure of a company’s creditworthiness.

“This poses two risks: overseas investors may repatriate part of their UK portfolio as confidence in the UK economy deteriorates (as asset allocation shifts due to the end of negative rates elsewhere); or foreign holdings of large UK holdings Assets will continue to weigh on primary income balances,” Sharma said.

“For whatever reason, as the UK economy struggles under the weight of rising inflation and slowing growth, foreign trade positions will be increasingly in focus.”

He added that UK assets were more expensive now than they were in 2021, when there was an influx of money into the country and the pound was increasingly seen as not as “undervalued” as the models suggested.

Bank of England is expected to continue raising interest rates to control inflation Fourth rate hike in a row takes its benchmark rate to a 13-year high It was 1% in early May. The World Bank expects inflation to rise to about 10 percent this year due to Russia’s war with Ukraine and China’s ongoing blockade.

However, Bank of America strategists are increasingly skeptical that the bank’s defense mechanisms can save the pound.

“Although not our core scenario, we think the pound finds itself in an increasingly objectionable position, with central bank communications becoming more challenging; imbalances are growing and the specter of Brexit remains on the domestic political scene It’s looming,” Sharma said.

“Investors increasingly see the pound as having emerging market characteristics, and a similar situation to the 1970s is seen as one of the worst post-war decades for Britain.”

He added that the Wall Street giant was concerned that the “increasing politicization” of U.K. policy would weaken the pound in a way that “looks like an emerging market”, a sign that investors are starting to hedge against the pound losing its status as a respected global currency.