logo

FX.co ★ GBP/USD: Analysts compare GBP to currencies of emerging markets

GBP/USD: Analysts compare GBP to currencies of emerging markets

The British pound is again approaching its multi-year low. Strategists are comparing the pound sterling with currencies of emerging markets.

Now, the UK is suffering a petrol crisis, a shortage of goods in its stores, and rather high inflation, which poses a threat of the key interest rate hike. All these facts fuel concerns about a possible slump in the pound sterling. Now, the currency is trading near $1,344, the lowest level last seen in December. It has already lost more than 2% this month.

See also: You can open a trading account here
GBP/USD: Analysts compare GBP to currencies of emerging markets

"The concern for macro investors is if sterling becomes a market that will become truly unpredictable," Jordan Rochester, a strategist at Nomura International Plc, said.

"The pound's descent suggests it's behaving more like an emerging-market currency", Adam Cole, chief currency strategist at RBC Europe, supposes.

Although it is not the first time that analysts have made such a comparison, it is still very controversial. The comparison with emerging markets was first made during the UK withdrawal from the EU. Now, the comparison was caused by disruptions in supply chains caused by Brexit and the coronavirus pandemic. Adam Cole pointed to widening spreads in the rates market as a possible reflection of concern about the state of Britain's finances, "with the caveat that it is too soon to know for certain". There is also a deep disagreement among traders over the real reasons for volatility. Besides, there are broad differences between the UK and such countries as Brazil or South Africa. It is impossible to compare them.

Credit risk is a significant factor in the pricing on their debt. This reduces their appeal in tough times. In addition, they are typically seen as haven assets. Volatility of the pound sterling is still lower than volatility of these currencies and other currencies of G10, including the Australian dollar and the Norwegian crown. Some analysts think that the recent sterling turbulence was caused by leveraged funds holding concentrated bets.

According to data from the Commodity Futures Trading Commission, during the week that ended on September 21, hedge funds were the most bullish on the pound in over two months. That was before last week's hawkish BOE meeting, which boosted bullish activity. "It's important not to exaggerate the significance of the move", Erik Norland, senior economist at CME Group said. "The pound is still the world's fourth-most widely used currency after the dollar, euro and yen," he added. Nevertheless, sharp changes in the pound sterling are keeping traders on their toes. Market participants trust the BOE and suppose that its approach in inflation stabilization is really effective.

Now, the central bank sees that inflation exceeds 4%. It admitted that the key rate hike may occur by the end of the year. "Sterling investors appear to be signaling the view that an early rate hike, as signaled by BOE Governor Bailey, will worsen the growth prospects for the UK," Jane Foley, head of foreign-exchange strategy at Rabobank, said. Meanwhile, three more energy suppliers stopped trading. As a result, more than 230,000 customers may face higher bills. As a result of the collapse of Enstroga, Iglo Energy and Symbio Energy, the number of British energy suppliers fell to nine and wholesale energy prices hit record highs. Igloo, a company that has 179 thousand clients, said that its business became unstable. Every sector of the UK economy is changing now. Even the London Metal Exchange may close. Housing sector also caused a lot of concerns.

Labor market situation

Over a million British workers have become uncertain about their future this week. The fact is that the UK may be the first major economy in the world to wind down its jobs support program. The program cost the British government over £64 billion ($93 billion). This is the most expensive element of the UK support program during the pandemic. Notably, in the UK unemployment benefits are lower than in the EU. Employment support measures in the UK and the EU differ from the ones used in the US. Other European countries with more traditional short-term workday programs, such as Germany, retain temporary support for a longer period, at least for the most affected sectors. However, with employers reporting record high job openings and an acute shortage of workers such as truck drivers, most observers believe the UK may end its program on September 30th. Tony Wilson, the director of the Employment Research Institute think tank, said that now the government should focus more on active measures to help people take existing jobs, rather than passive measures.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade
Go to the articles list Go to this author's articles Open trading account