Shrinking credibility leaves sterling resembling an emerging-market currency
“Investors are increasingly discussing GBP as taking on emerging-market characteristics… parallels to the 1970s resonate as being one of the worst post-war decades for the UK,” says Kamal Sharma of Bank of America. The pound has been the third worst-performing currency in the G10 club of developed countries this year, behind the Japanese yen and the Swedish krona.
Blame the “increasing politicisation” of UK monetary policy, which is undermining confidence in sterling in a way reminiscent of an emerging economy, while foreign investors are less willing to fund the UK’s trade deficit as UK assets now appear less undervalued than they were in 2021.
Comparison of the pound with an emerging-market currency is “hyperbolic”, but “it is true that sterling no longer behaves like the hard currency it once was”, says Jim Armitage in The Sunday Times. “Since December, the Bank of England (BoE) has hiked rates four times – but the pound has barely reacted.” A “currency’s strength is, in large part, a reflection of the market’s view on the productivity and strength of the economy behind it”.
Since Brexit sterling has been valued at a discount to account for the diminished prospects for British exporters and rising UK labour costs.
There are valid questions about the BoE’s performance, says Jeremy Warner in The Daily Telegraph. “Too often it seems a creature of the government’s need for deficit financing”, rather than an independent institution. “The government’s refusal… to acknowledge that Brexit has played any part in deteriorating trade only further inflames the situation.”
That doesn’t mean sterling’s days are numbered. A strong dollar explains as much as any domestic UK problems. “Against the euro, the pound’s lost only a couple of cents.”
If the US dollar keeps rising from here, it’s going to hurt