The Bank of America says the sterling “finds itself in an increasingly invidious position” for reasons including “increasingly challenging” Bank of England communication. The pound has fallen by 6.6 percent this year against the dollar, leaving the pound amongst the worst global performers against the greenback.
One financial expert suggests the outlook for the pound was looking very “grim”.
Kamal Sharma, a foreign exchange strategist based in London said: “Sterling’s fall from grace has been epic given last year’s euphoria and in many ways has caught the investor community by surprise.
“This has resulted in a confusing communication strategy: hiking rates against a sharply slowing economy is never a good look for any currency.”
The pound has been on a steady decline since June 2021 versus the dollar.
Current rates see the pound worth $1.26, down from $1.42 in May.
Adding to the analysis Mr Sharma wrote to clients warning them of the dilemma.
He said: “Whilst not wishing to over-exaggerate GBP’s predicament as some kind of ‘end-of-days’ scenario, we are concerned that the increasing politicization of UK policy undermines the GBP in ways that would appear EM-like.
“We sense something is changing in the UK, with the BOE increasingly hard to decipher and less transparent; a failure to discuss and acknowledge that Brexit has been a significant headwind to the supply side; and a sense that the BOE is losing control over its mandate.”
The Bank of England has come under intense criticism in recent months over its response to inflation, which is the highest in forty years as it tickles double figures.
In spite of four interest rate increases since December, the pound is the third-worst performing global currency this year.
Citigroup analyst Vasileios Gkionakis said: “At a point of increased uncertainty over domestic growth, signs of regional fragmentation and Northern Ireland-related risks, the UK will find it increasingly difficult to attract portfolio flows to finance a widening current-account deficit.”
A weaker pound has a double-sided effect.
On the one hand, with a weaker currency, foreign tourists coming to the UK are able to gain more pounds with their currency, hence allowing them to contribute to the British tourism industry in greater numbers.
On the other hand, Brits wishing to travel to the US and Europe are seeing less dollars and euros per pound, making spending whilst abroad less appealing.
The pound has also steadily fallen against the euro over the last 12 months.
According to data, the pound bought 1.21 euro 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 yet another bailout to assist struggling families.
However, experts predict the pound could benefit against the dollar and euro should Chancellor Rishi Sunak’s plan boost UK consumer confidence over the coming weeks.
The economics consultancy Capital Economics estimates UK GDP growth will be stronger to the tune of about 0.2-0.3 percentage points.
Analysts at Investec and Pantheon Macroeconomics meanwhile say the cash boost significantly lowers the risk of the UK economy falling into recession.
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Dominic Bunning, Head of European FX Research, HSBC Bank said: “The extra help being offered to a range of consumers should alleviate at least a portion of the increasing cost of living pressures that have been threatening to drag growth lower.
“The British pound is being pushed and pulled by the government’s latest policy announcements regarding the energy sector, with potentially positive cyclical signals battling against contrastingly negative structural ones.
“Until it is clearer how this new fiscal policy interacts with monetary policy, GBP may struggle for direction, in our view.”
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