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


A trader pauses while monitoring financial data on a computer screen at ETX Capital, a contract for difference broker, in London, UK on Friday, October 7, 2016.

Chris Ratcliffe | Bloomberg | beautiful pictures

LONDON – Sterling Follow Bank of America.

As of Tuesday afternoon in Europe, the pound was down 7% against dollars Year-to-date, trading is just under $1.26 and as low as $1.22 earlier this month.

Short positions have been mounted against the currency as the global economic challenges of the war in Ukraine, inflation, supply chain bottlenecks and slowing growth converge with domestic risks stemming from Bank of Englandunique predicament and consequences from Brexit.

In a research note on Monday, BofA G-10 Senior FX Strategist Kamal Sharma said sterling is likely to continue to weaken through 2022.

He also rejected comparisons between the monetary tightening paths of US Federal Reserve and the Bank of England, argue that the response functions of the two central banks are different.

“The challenges facing the BoE are unique along with supply dynamics that they absolutely don’t want to discuss: Brexit. This has led to a confusing communication strategy: raising interest rates relative to the economy going on. A sharp slowdown is never a good look for any currency,” Sharma said.

“The current easing of environmental risks and fiscal stimulus could help cushion some of the damage but the damage has been done and the outlook for GBP looks tough.”

The preferred means of capitalizing on the “epic” fall of the pound from grace to BofA is through an advance euro against the pound, Sharma added.

This was echoed on Tuesday by George Saravelos, Deutsche BankCo-head of global FX research, who told CNBC that optimism is greater about Europe’s growth, as well as the “non-linear” effects of the European Central Bank’s return to rates positive, which means that the euro is poised to outperform the dollar. and British Pound Sterling.

“If you look at what is happening with capital flows into the UK, they go flat and right after the ECB goes flat you see a big acceleration of capital inflows into the UK – for example the purchase of gilts from the UK.

“When that dynamic shifts and the Bank of England comes to a near-much stall – it’s a reluctant tightening, so to speak – you’ll see the euro significantly higher. We see it above 90 pence. next year.”

As of Tuesday afternoon, the euro was trading above £0.85.

The UK economy shrinks 0.1% in March and economists are expecting further declines this year, as the country’s cost-of-living crisis deepens. Inflation spiked to an annualized 9% in April as food and energy prices spiraled.

Similar to the 70s

Central to the bleak outlook for the pound, Sharma noted, is the UK’s net international investment position, which has deteriorated in recent years as foreign investors hold large amounts of assets. property of the United Kingdom.

The NIIP measures the difference between the UK-owned property claim for non-residents and the foreign-owned property claim for UK citizens, an important measure of how much credibility of a company.

“This carries with it two risks: foreign investors could repatriate part of the UK’s asset portfolio due to deteriorating confidence in the UK economy (a shift in asset allocation due to loss of interest) negative yields elsewhere); or large foreign holdings of UK Assets will continue to weigh on the main balance of income,” said Sharma.

“Whatever the reason, the foreign trade position will increasingly become central to markets as the UK economy grapples with the weight of higher inflation and slowing growth.”

UK assets are now more expensive than they were in 2021, when capital inflows are substantial and the pound is increasingly seen as less “undervalued” than suggested models, he added.

The Bank of England is expected to continue raising interest rates to curb inflation, after Fourth straight hike takes prime interest rates to 13-year high 1% at the beginning of May. The bank thinks inflation will rise to around 10% this year as a result of the Russo-Ukrainian war and the persistent shutdowns in China.

However, Bank of America strategists are increasingly skeptical that the Bank’s defense mechanism can rescue the pound.

“While not our focus scenario, we think the pound is in an increasingly dangerous position where central bank communication becomes increasingly challenging; where imbalances are growing and the specter of Brexit still looms large in domestic politics,” Sharma said.

“Investors are increasingly discussing the GBP as it embraces emerging market ethos while the parallels with the 1970s resonate as one of the worst post-war decades for the UK. .”

He added that the Wall Street giant is concerned that the UK’s “increasing politicization” is weakening the pound in ways that “look like EM”, suggesting investors are starting to Hedging for the pound to lose its status as a respected global currency.



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