The Bank of America says the pound “finds itself in an increasingly odious position” for reasons including “increasingly difficult” communication from the Bank of England. The pound has fallen 6.6% this year against the dollar, leaving the pound among the world’s worst performers against the greenback.
A financial expert suggests that the pound’s outlook looked very “gloomy”.
Kamal Sharma, a London-based currency strategist, said: “Sterling’s fall from grace has been epic given the euphoria of the past year and in many ways has taken the investment community by surprise.
“It resulted in a confusing communication strategy: raising rates in the face of a sharply slowing economy is never a good idea for a currency.”
The pound has been falling steadily since June 2021 against the dollar.
Current rates see the pound worth $1.26, down from $1.42 in May.
Adding to the analysis, Mr. Sharma has written to clients warning them of the dilemma.
He said: “Without wishing to exaggerate GBP’s predicament as some kind of ‘end of days’ scenario, we fear that the growing politicization of UK politics could undermine GBP in a way that looks like the markets emerging.
“We sense something is changing in the UK, with the BOE becoming harder to decipher and less transparent; an inability to discuss and acknowledge that Brexit has been a significant headwind on the supply side; and the feeling that the BOE is losing control of its mandate.
The Bank of England has come under heavy criticism in recent months over its response to inflation, which is the highest in forty years as it tickles the double digits.
Despite four interest rate hikes since December, the pound is the world’s third worst performing currency this year.
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Citigroup analyst Vasileios Gkionakis said: “At a time of heightened uncertainty over domestic growth, signs of regional fragmentation and risks related to Northern Ireland, the UK will increasingly struggling to attract portfolio flows to finance a growing current account deficit.”
A weaker pound has a two-sided effect.
On the one hand, with a weaker currency, overseas tourists coming to the UK can earn more pounds with their currency, allowing them to contribute more to the UK tourism industry.
On the other hand, Britons wishing to travel to the US and Europe are seeing fewer dollars and euros per pound, making spending abroad less attractive.
The pound has also fallen steadily against the euro over the past 12 months.
According to the data, the pound bought 1.21 euros in May, falling to a current rate of 1.17 at the time of writing.
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With the cost of living crisis having a major impact on households across Britain, the government has been forced to issue another bailout to help struggling families.
However, experts predict that the pound could benefit against the dollar and the euro if Chancellor Rishi Sunak’s plan were to boost British consumer confidence over the coming weeks.
Economic consultancy Capital Economics estimates that UK GDP growth will be stronger, by around 0.2 to 0.3 percentage point.
Analysts at Investec and Pantheon Macroeconomics meanwhile say the increased cash position significantly reduces the risk of the UK economy falling into recession.
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Dominic Bunning, Head of European Currency Research, HSBC Bank, said: “The additional relief offered to a range of consumers should alleviate at least some of the rising cost of living pressures that threaten to depress growth. .
“The pound is being pushed and pulled by the latest government policy announcements regarding the energy sector, with potentially positive cyclical signals battling negative structural signals.
“Until it’s clearer how this new fiscal policy interacts with monetary policy, the pound may struggle to steer, in our view.”
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