British pound is taking on ‘emerging market’ characteristics

Short positions have been mounting against the currency

Sterling is in danger of becoming an “emerging market” currency as falling growth and growing risks cause investors to flee the pound, according to Bank of America.

As of Tuesday afternoon in Europe, sterling was down 7% against the dollar year-to-date, trading just below $1.26 having been as low as $1.22 earlier this month. Short positions have been mounting against the currency as the global economic challenges of the war in Ukraine, inflation, supply chain bottlenecks and slowing growth converge with domestic risks stemming from the Bank of England’s unique predicament and the fallout from Brexit.

In a research note Monday, BofA Senior G-10 FX Strategist Kamal Sharma said further weakness can be expected in the pound through the rest of 2022. He also dismissed comparisons between the monetary tightening paths of the U.S. Federal Reserve and the Bank of England, arguing that the reaction functions of the two central banks are different.

“The challenges facing the BoE are unique along with a supply dynamic that it remains wholly unwilling to discuss: Brexit. This has resulted in a confusing communication strategy: hiking rates against a sharply slowing economy is never a good look for any currency,” Sharma said.

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