Weakening pound faces ‘existential crisis’, warns Wall Street bank

THE pound is facing an “existential crisis” and is likely to weaken further during this year, one of Wall Street’s top banks has warned.

Bank of America says sterling “finds itself in an increasingly invidious position” for reasons including “increasingly challenging” Bank of England communication. Kamal Sharma, a London-based foreign exchange strategist for the lender, said the outlook for the pound was “grim”.

The warnings came as the price of oil breached $120 (£95) a barrel yesterday, hitting a two-month high amid tightness in the market and concern over supplies. Oil prices have risen amid tight supply driven by the fallout from Russia’s war in Ukraine, as well as increased demand as more economies return from Covid-related restrictions. China announced easing of its restrictions, while the European Union worked on a plan to ban imports of Russian crude.

The pound has fallen about 6.6pc this year in dollar terms, leaving it as one of the worst performers among the major currencies. Only the Norwegian krone, Swedish krona and Japanese yen have performed worse. Earlier this month, it fell to its lowest level against the dollar in almost two years on expectations the Bank will not increase interest rates as quickly as the Federal Reserve.

In a note to clients, Mr Sharma 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.”

He warned that Threadneedle Street is facing “unique” challenges. “This has resulted in a confusing communication strategy: hiking rates against a sharply slowing economy is never a good look for any currency.”

Mr Sharma added: “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 sense that the BOE is losing control over its mandate.”

Mr Sharma said Bank of America analysts are “increasingly sceptical” that rate increases can “come to the rescue of the pound”.