In volatile currency markets, one trade stands out as an easy bet
With the world’s fifth-biggest economy grappling with a particularly unhealthy cocktail of slowing growth and surging inflation, the British currency has become the medium of choice to express a negative view.
While the British economy’s problems are broadly similar to what other policymakers are grappling with, a few unique factors additionally weigh on the pound. Then there is an increase in tax burdens, which followed massive temporary relief for struggling sectors during the pandemic and which has hit workers and employers already saddled with surging energy bills, adding to the drag on the economy.
Jane Foley, head of FX strategy at Rabobank says markets have slashed their UK rate hike expectations in recent weeks because recession risks have grown. Respondents in a Reuters poll assign a 35% probability of a recession within a year. As the war in Ukraine added more fuel to price pressures, UK growth expectations and consumer confidence tumbled because of the soaring inflation, the protracted conflict and concerns about the impact of extended COVID lockdowns on growth in China, Britain’s third biggest trading partner.
The British currency’s transformation into a poster child of the stagflation risks facing the global economy has been swift.
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