British pound: sick in the currency world

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London — In a volatile currency market, one transaction stands out as an easy bet. It’s selling British pounds.

The UK currency has become a medium of choice for expressing negative views as the world’s fifth-largest economy wrestles with a particularly unhealthy cocktail of slowing growth and rising inflation.

Inflation reached a 40-year high of 9% in April, according to official data on Wednesday. That’s more than four times the Bank of England’s 2% target, but the UK’s worst living expenses in 30 years will not subside until later this year. Reuters will vote.

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And while the BoE was the first major central bank to raise interest rates in December, their projected future path is now far more than some global peers, including the US Federal Reserve. Not sudden.

The problems in the UK economy are similar to those addressed by other policy makers, but some unique factors are further squeezing the pound.

One is the possibility of a nasty trade dispute with the European Union if Britain threatens to promote legislation that invalidates some of Northern Ireland’s post-Brexit trade agreements.

A long-term trade war could further widen the current account deficit and subsequently weaken the currency.

Since then, tax burdens have increased, hitting workers and employers already suffering from a surge in energy bills, following a temporary major bailout for the sector struggling during a pandemic, and hampering the economy. It has become.

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Wouter Sturkenboom, Chief Investment Strategist at EMEA and APAC in Northern Trust Asset Management, said:

Money markets are currently expecting only 120 basis points for cumulative rate hikes by the end of the year, compared to the Fed’s nearly 2 percent full point. The more cautious European Central Bank is expected to raise interest rates by 108 basis points during that period.

Jane Foley, head of FX strategy at Rabobank, said the market has significantly lowered its UK rate hike expectations in recent weeks due to the increased risk of a recession. Reuters poll respondents have assigned a 35% chance of a recession within a year.

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Kaspar Hense, Senior Portfolio Manager at Bluebay Asset Management in London, said the portfolio is out of currency.

“The pound is expected to be the weakest of all major currencies, as central banks are reluctant to raise interest rates aggressively, which means they have the lowest inflation-adjusted yields of their rivals. “He said.

Britain’s growth expectations due to rising inflation, protracted conflicts and concerns over the impact of long-term COVID lockdowns on the growth of China, Britain’s third-largest trading partner, as the war in Ukraine added more fuel to price pressure And consumer confidence has declined.

Citibank’s index, which measures fares in economic data compared to expectations, is lower in the UK than in other Europe and the US, suggesting higher economic headwinds.

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Turn in the wrong direction

This suggests that the UK rate hike cycle is short-lived. HSBC strategists use a three-year and one-year market interest rate spread to predict that interest rates will peak in June 2023, rise to 2.5%, and then fall.

“Consumer outlook has turned worse as the pressure on real income is so severe that it makes it very difficult for the Bank of England to offer near-price futures,” HSBC said.

HSBC now expects the pound to reach the end of the year at $ 1.20, which is about 8% weaker than the previous $ 1.30 forecast.

The pound traded at $ 1.24 on Wednesday, down nearly 8% so far this year, not far from the May 2020 low, which was also below $ 1.21 last week.

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The conversion of the British currency to the poster child of the stagflation risk facing the world economy was swift.

In early December, hedge funds were still betting on the dollar and favoring the pound. Six months later, it completely turned into the largest short pound bet in more than two and a half years.

The outlook is still bleak. The three-month UK pound risk reversal, which measures the ratio of sell and buy options, is a one-month high and expected price volatility remains high for nearly two years.

(Report by Saikat Chatterjee, additional report by Dhara Ranasinghe and Joye Alves, edited by Tomasz Janowski)