UK & Sterling facing potential quadruple whammy
Sterling has enjoyed a strong, if bumpy ride, since late-June. It has been the second strongest major currency against the US Dollar and appreciated 3.7% in NEER term, thanks in part to a build-up of speculative long-Sterling positions.
Markets have seemingly taken heart from government measures to support the economy, including the labour and housing markets and service sector, the Bank of England’s so-far unflinching commitment to quantitative easing and the sharp rebound in economic activity in June-August.
At the same time markets have seemingly ignored the British economy’s material underperformance relative to other major economies in Q2 and the government’s arguably incompetent and incoherent handing of the covid-19 pandemic.
However, the economy faces a potential quadruple whammy in coming months of fiscal stimulus measures being unwound, a no-deal Brexit, higher taxes and a re-tightening of national lockdown measures in the event of the number covid-19 cases rising sharply during the winter months.
This leaves Sterling vulnerable, in our view, particularly in the context of relatively elevated long Sterling speculative positions.
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Olivier is an economist and rates & FX strategist with over 22 years experience in financial markets. He is Director and Founder of 4X Global Research, an independent, London-based consultancy which provides institutional and corporate clients with substantive research, high-quality analysis and insight on emerging and G20 economies and financial markets.