The pound is not in any crisis, Pound Sterling Live argued this morning, citing a range of media and newspapers that continue to claim that the pound is in trouble. There are potential dangers of course, especially from a return of Brexit anxieties, but there are also supportive factors such as the ongoing economic recovery and the prospect of an early Bank of England interest rate rise in late-2021/early-2022. Analysts at Pound Sterling Live also noted that a mixed set of views on the outlook of a currency is a common thing and does not signify a serious concern.
At the same time, Bloomberg, has warned that the pound is going to fall, and said that investors are betting against the pound as they are worried that Bank of England’s efforts to reduce inflation would hurt consumer sentiment and the growth outlook.
Traders have increased their bets against the pound, as they expect the currency to fall at the fastest rate in more than two years. Canadian Imperial Bank of Commerce, RBC Europe Ltd., and Société Générale SA strategists are also expecting the pound to fall to levels last seen in late 2020. Bloomberg highlighted that sentiment was at its most bearish in seven months, as traders are not optimistic on the pound.
The UK’s high inflation and low growth are also reasons for concern for Bank of America strategists who said “any strength in the pound is an opportunity to sell.” Analysts are concerned that inflation and the end of the furlough scheme will influence real incomes. Governor of the Bank of England Andrew Bailey warned of a potentially “very damaging” inflation period unless the Bank acts accordingly. By tightening its policy earlier, the Bank could also tighten household spending and increase mortgage payments, undermining the UK’s recovery.
Strategists for RBC have also noted that higher interest rates could push the pound lower, and many are concerned that if the Bank moves too fast, there will be a squeeze in real incomes, which is already evident due to high energy prices and tighter fiscal policy.
Pound not in crisis
While the pound to dollar rate might be weaker, the drop is not demonstrating a “chaotic” fall, Pound Sterling Live analysts have suggested. They have criticised different analysts who have linked supply chain issues to the UK’s performance. While such problems are real, Pound Sterling Live analysts have argued that such issues are not specific to the UK, and they pointed to the US and similar supply chain issues. In regard to the fuel crisis, they criticised panic-buying and motorists who have run to fuel stations. They have also pointed out that the connection of the pound to emerging market currencies is false, as a lot of the weakness of the pound can be blamed to a stronger US dollar. As they say, many investors have mistakenly taken a very negative stance towards the pound, arguing that there are tougher times ahead and the macro-outlook for the pound is deteriorating.
The dollar’s safe-haven status and its higher demand in times of global economic nervousness has helped elevate it at the expense of the pound. Pound Sterling Live has also clarified that the mixed range of forecasts offered by major financial institutions is not indicative of a crisis but is natural among other currencies. Risks of course remain, but they argue that the negative pound outlook is overstated.
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