Sterling is 'in the global doghouse'
Last week, the pound hit a five-month low against the euro and fell by 2.6% against the dollar. And it looks like sliding further still.
When risk appetite is high, sterling usually does well. But this time the pound "has not been invited to the party", says Deborah Hyde on Citywire.co.uk. In fact, it's "in the global doghouse", says Jim Wood-Smith of Williams de Bro, hitting a five-month low of around £0.90 to the euro and falling by 2.6% against the dollar last week.
Sentiment was hurt by the Bank of England's (BOE) announcement that it might lower the interest rate that it pays on deposits that banks hold with it; the idea was taken as a sign that the policymakers think quantitative easing (QE) isn't working as well as they hoped. In turn, this also increases the odds of interest rates staying at record lows for a long time.
The currencies of other economies still engaged in QE have also been weak, including the dollar. But while most central banks have been hinting at tightening, the BOE recently increased the amount of money it's printing to throw at the economy.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Given the mounting expectations of low interest rates being maintained, sterling could become a funding currency for the carry trade (meaning it would be sold to fund the purchase of higher-yielding assets elsewhere, as the yen was until recently), says Melinda Burgess of RBS. That development would put further downward pressure on sterling as the global economy improves.
Meanwhile, the BOE has compounded jitters by suggesting that, following the financial crisis, foreign investors may have become less willing to fund our current-account deficit. This would imply a lower long-term exchange rate for the pound. Analysts at Citigroup and BNP Paribas expect the pound to slide to parity with the euro.
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
-
What happens if you can’t pay your tax bill, and what is "Time to Pay"?
Millions are due to file their tax return this Friday as the self-assessment deadline closes. Though the nightmare is not over until you pay the taxman what you owe - or face a penalty. But what happens if you can't afford to pay HMRC your tax bill, and what is "Time to Pay"?
By Kalpana Fitzpatrick Published
-
What does Rachel Reeves’s plan for growth mean for UK investors?
Rachel Reeves says she is going “further and faster” to kickstart the UK economy, but investors are unlikely to be persuaded
By Katie Williams Published