The political pound: what the experts think
● A fall from grace Interest rate rises are usually a boon for currency strength, but despite four hikes since December, the pound has continued to lose ground against most key rivals in 2022, said Tommy Stubbington in the FT. From a high of $1.42 a year ago, sterling has declined to around $1.25 – an “epic fall from grace”, according to Bank of America forex strategist Kamal Sharma, that has “caught the investor community by surprise”. To add insult to injury, Sharma reckons the pound is now taking on “emerging market” characteristics, as falling growth and mounting political and economic risks “cause investors to flee”, said CNBC. Certainly, “short positions have been mounting”. It isn’t exactly a message that a government on the ropes wants to hear.
● Downing Street drama
The ongoing drama in Downing Street continues to cause daily movements, said Louis Ashworth in The Daily Telegraph. The pound pushed slightly higher after Prime Minister Boris Johnson survived this week’s confidence vote – partly on hopes that the rebellion could result in a “watering down” of Brexit policy on Northern Ireland, “alleviating fears of an EU trade war”. But the rally proved short-lived, said Bloomberg. The following day, sterling hit a two-week low as traders bet on continuing “political turmoil” and an ongoing cost-of-living crisis that could well spell recession. The fear in forex and bond markets is that a wounded PM may push for further stimulus measures “to improve his popularity”, said Frédérique Carrier of RBC Wealth Management. That would only worsen inflation and force the BoE to raise interest rates even higher.
● The B word
Clearly, there are real concerns about the pound’s “credibility”, said Jeremy Warner in The Sunday Telegraph. But it’s not yet the basket case Bank of America imagines. “Looking around the world… you would struggle to find a jurisdiction where things look notably better.” The difference, said Jim Armitage in The Sunday Times, is that none of our major competitors has just crippled trading with its biggest export market. Above all else, the weak pound reflects falling confidence on the impact of Brexit on Britain’s productivity. “Partygate, policy drift and other petty messes… should not make us lose sight of that.”