A trader stops while monitoring financial data on a computer screen at ETX Capital, the broker for contracts-for-differences, on Friday, October 7, 2016, in London, UK.
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london – Real Falling growth and rising risks are at risk of becoming an “emerging market” currency, with investors fleeing the pound. bank of america,
As of Tuesday afternoon in Europe, sterling was down 7% against 7% Dollar Year-to-date, trading was as low as $1.22, just below $1.26 earlier this month.
Short position rising Inflation, supply chain bottlenecks and slow growth stem from domestic risks, as global economic challenges in Ukraine war against currency bank of englandThe unique situation of and the outcome of Brexit.
In a research note on Monday, BofA senior G-10 FX strategist Kamal Sharma said further weakness in the pound can be expected for the rest of 2022.
He also rejected comparisons between monetary tightening paths. US Federal Reserve and the Bank of England, arguing that the response functions of the two central banks are different.
Sharma said, “The challenges facing the BoE are unique with a supply dynamic that it is not fully prepared to discuss: Brexit. This has resulted in a confusing communication strategy: raising rates against an increasingly slowing economy. Growth never looks good for any currency.” Told.
“Adjusting current risk from environmental and fiscal stimulus may provide some relief but the damage has been done and the outlook for GBP looks grim.”
Sterling’s favorite means of capitalizing on “epic” is below grace for Boffa euro Against the pound, Sharma said.
This was echoed by Jorge Cervelos on Tuesday, Deutsche Bankglobal head of FX research, who told CNBC that more optimism about European growth, as well as the “non-linear” effects of the European Central Bank’s return to positive rates, means the euro is expected to outperform both the dollar and the dollar. ready for pound.
Cervelos said, “If you look at what was happening to UK flows, they were going sideways and as the ECB turned negative, you saw a huge acceleration of inflows into the UK – for example, of UK gilts.” Purchase.”
“As the dynamic changes and the Bank of England is so close to halt – it’s a reluctant tightrope, so to speak – you should see the Euro-sterling significantly higher. We see it above 90 pence by next year.”
As of Tuesday afternoon, the euro was trading above 0.85 pounds.
UK economy shrank 0.1% in March And economists are expecting further contraction this year, as the country’s subsistence crisis deepens itself. Inflation rose to 9% year-on-year in April on the back of a jump in food and energy prices.
Similarities to the 70s
At the heart of the dismal outlook for the pound, Sharma said, is that the UK’s net international investment position has worsened in recent years as foreign investors hold a large stock of UK assets.
The NIIP measures the difference between UK-owned property claims on non-residents and foreign-owned claims on UK residents, an important gauge of a company’s creditworthiness.
“There are two risks: foreign investors may withdraw part of this portfolio of UK assets on deteriorating confidence in the UK economy (asset allocation shifts due to the end of negative interest rates); or that large stocks of foreign holdings are primary income.” The weight of UK assets on balance will continue,” Sharma said.
“For whatever reason, external trade conditions will become an increasing focus for markets as the UK economy struggles under the weight of high inflation and slowing growth.”
UK assets are now more expensive than in 2021, when inflows into the country were significant, and the pound is considered less “undervalued” than the model suggests, he said.
The Bank of England is expected to continue raising interest rates to rein in inflation. Fourth consecutive hike pushes its base rate to 13-year high 1% in early May. The bank sees inflation rising to around 10% this year as a result of the Russo-Ukraine war and continued lockdowns in China.
However, Bank of America strategists are increasingly skeptical that the bank’s defense mechanism can save the pound.
Sharma said, “While we do not have a centralized scenario, we think Sterling finds itself in an increasingly aggressive position, where central bank communication is becoming increasingly challenging, where imbalances are rising and where the specter of Brexit is rising.” Still hovering over the domestic political scene.”
“Investors are increasingly discussing the GBP as it takes on emerging market characteristics parallel to the 1970s as one of the worst post-war decades for Britain.”
He added that the Wall Street giant is concerned that “increasing politicization” of UK policy weakens the pound in a way that “will look like the EM,” suggesting investors look to the pound as a respected global currency. Start hedging to lose your position.