As the world’s fifth-largest economy jumps in, especially with unhealthy growth and rising inflation, the British currency has become the preferred medium for expressing a negative outlook.
Official data on Wednesday showed that inflation reached a 40-year high of 9% in April – more than four times the Bank of England’s 2% target when Britain’s worst living spending in three decades will not fall by the end of this year, according to a Reuters poll.
And while the BoE was the first of the major central banks to raise interest rates in December, their now-predictable path is much less steep than some of its global counterparts, including the US Federal Reserve.
Although the problems in the British economy are broadly similar to those faced by other policymakers, there are a few unique factors that place additional emphasis on the pound.
One is the possibility of a chaotic trade conflict with the European Union if Britain threatens to pass legislation to override parts of the post-Brexit trade agreement for Northern Ireland.
Any protracted trade war threatens to widen the current account deficit and subsequently weaken the currency.
Then came the tax burden, which followed massive temporary relief for struggling sectors during the epidemic and hit workers and employers already involved in rising energy bills, adding to the strain on the economy.
“The Opportunity A UK recession Is Everything is guaranteed because there are so many headwinds in the economy, “said Wauter Starkenboom, chief investment strategist at APAC, EMEA and Northern Trust Asset Management.
The money market now expects only 120 basis points of growth at the end of the year, compared to the Fed’s nearly two full percentage points. Even more cautious European central banks are expected to raise interest rates by 108 basis points during that time.
Jane Foley, head of RoboBank’s FX strategy, says markets have lowered their expectations of a UK rate hike in recent weeks as the risk of a recession has increased. Respondents in a Reuters poll put the probability of a recession at 35% within a year.
Caspar Haynes, a senior portfolio manager at Asset Management in Blue, London, says he has shortened the currency in his portfolio.
“The pound has the weakest outlook of all major currencies because the central bank’s reluctance to aggressively raise interest rates means it has the lowest inflation-consistent yield among its competitors,” he said.
As Ukraine’s war adds fuel to the price pressure, protracted conflict and concerns about the impact of the extended Covid lockdown on the growth of China, Britain’s third-largest trading partner, have dampened rising inflation, UK growth expectations and consumer confidence.
Citibank’s indexes measure how economic data rents are lower than expected for the rest of Europe or the United States for the UK, suggesting a growing economic headwind ahead.
Turn for the worse
This suggests that any British rate hike cycle would be short-lived. Using spreads between three-year and 1-year market interest rates, HSBC strategists predict that interest rates will peak in June 2023, rising to 2.5%., And then the rate will follow less.
“Consumer outlook has worsened as real income pressures are tightening and this will make it very difficult for the Bank of England to deliver anything close to the price in the forward rate market,” HSBC said.
HSBC now expects the pound to end at 20 1.20 this year, about 8% weaker than its previous $ 1.30 forecast.
On Wednesday, the pound was trading at 24 1.24, down about 8% so far this year and hitting গত 1.21 again last week, not less than in May 2020.
The conversion of the British currency into a poster child facing the risk of stagnation in the face of the global economy has accelerated.
In early December, hedge funds were still betting against the dollar and in favor of the pound. Six months later it has completely overturned into the biggest short pound bet in more than 2-1 / 2 years.
The outlook remains dark. The three-month British pound risk reversal, which measures buying options to the ratio of sales, is at a one-month high when the expected price swing is close to a two-year high.