Even as Britain’s Queen Elizabeth celebrated 70 years on the throne, the mood in the markets towards the pound was anything but cheerful.
rampant inflation, an economy on the verge of recession and a scandal-prone government fuel the idea that the British currency is vulnerable.
Even the language of the strategists is miserable. Bank of America said investors should hedge against an “existential” crisis in the pound and the currency faces difficulties typically seen in emerging markets.
“Of all the major countries, the UK faces a much more difficult economic environment, a much more difficult political choice and a much more difficult political environment,” said Steven Barrow, head of FX strategy at Standard. Advisory London.
“From a forecast perspective, I think it’s more likely for the pound to go down to $1.20.”
The UK’s economic woes add to a bleak picture that has lingered since the Brexit vote in 2016.
Traders point to a less favorable business environment and the tumultuous leadership of Prime Minister Boris Johnson who has done little to attract the foreign investment the UK needs after leaving the European Union.
The pound strengthened by 0.2pc in May, but remains the third worst performing major currency this year. It weakened by 8% to $1.2468 in 2022.
The biggest risk facing the currency is the expectation of too many interest rate hikes from the Bank of England, according to Roberto Mialich, currency strategist at UniCredit. He expects a single increase of 25 basis points, probably in August, compared to 140 basis points by December, depending on the market price.
“As long as investors are forced to revise their expectations for rate hikes down, the pound is likely to weaken,” Mialich said.
This could send Cable below $1.20 and Euro-Sterling above 95p, he added.
The Bank of England has already warned against the risk of plunging the economy into a recession by tightening too quickly. The Institute of Directors has released findings showing that executives are more pessimistic than at any time since October 2020, with more than a fifth of companies planning to cut investment.