Since the Brexit vote to leave the European Union on June 23, 2016, pound sterling suffered a record fall against the US dollar, before making a huge recovery but then plummeting to its weakest level in 35 years. Bank of America analysts Kamal Sharma and Myria Kyriacou said the “liquidity” of the pound – the difference between the rates at which traders are willing to buy and sell – appears worse than for other major global currencies.
They claim their research shows that during the coronavirus crisis, only Brazil has shown more volatility in foreign exchange futures markets than sterling.
The analysts therefore argue the pound almost resembles an emerging market (EM) currency – such as South Africa’s rand or Turkey’s lira – rather than compared to traditional peers such as the US dollar or the euro
They said in a note to investors: “The analysis of sterling cannot be undertaken within a traditional G10 framework.
“A more bespoke view of the pound is required and one that would take an EM-esque view.”
“We believe sterling is in the process of evolving into a currency that resembles the underlying reality of the British economy: small and shrinking with a growing dual deficit problem similar to more liquid emerging market currencies.”
But veteran political broadcaster Andrew Neil has hit back at these bleak warnings.
Reacting to the forecasts on Twitter, he replied: “Don’t worry. They’re nearly always wrong!”
The Bank of America analysts make clear the result of the Brexit referendum has largely triggered the volatility in the pound over the past few years.
They warned this will likely continue and even intensify as the UK formally leaves the EU next year following the end of the transition period.
The analysts continued: “Brexit is likely to permanently alter the way in which investors view the pound.”
They also forecast the UK Government’s fiscal deficit at six percent of GDP next year and the current account – the amount the country as a whole borrows from abroad – at four percent.
This means the country’s “dual deficit” – a combination of the two measures – would be higher than the average across the G20, as well as that of South Africa and Turkey.
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Petr Krpata, a currency analyst at the Dutch bank ING, warned the pound could plummet further if post-Brexit trade talks between the UK and EU collapse.
He said: “If there is no agreement on the UK-EU trade deal by the year-end and no extension of the transition period, we expect the euro and sterling to move towards parity.”
On the evening of June 23, 2016 – when the UK population voted in favour of leaving the EU – the pound suffered a record one-day plunge against the US dollar.
In the weeks leading up to the referendum, sterling was trading as high as $1.45, but had plummeted to just $1.22 by the end of that year.
The pound has staged a remarkable recovery since then, jumping to a high of $1.42 as expectations from traders grew over a softer-style Brexit deal.
But it has plummeted again, falling to a 35-year low of $1.15 as panic swept through financial markets during the height of the coronavirus pandemic.