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.
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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.
