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Pound outlook mixed, but currency not in crisis

12 Oct 2021

Although the outlook for Sterling may be mixed, recent media reports have indicated the currency is in the midst of another existential crisis akin to Brexit.

The Pound-to-Euro exchange rate is near to retesting its year-highs, whilst the Pound-to-Dollar rate is now recording a loss for the year. However, the declines are limited and not indicative of a tumultuous breakdown.

Nevertheless, some analysts have combined recent supply chain problems in Britain to Sterling’s performance, reports Pound Sterling Live.

"I have to admit that my sympathy for all those Brits who voted in favour of Brexit in 2016 and now have to queue for fuel is limited," said Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank.

Although there are supply issues in the UK, there are also problems in the U.S. and Europe, the latter suffering with soaring gas prices: "While the crisis is global, Europe has been hit by several aggravating factors that could make the crisis more acute,” reports Euronews.

Furthermore, a note from Morgan Stanley said the UK "has become the proverbial lightening rod for investor concerns around inflation given higher relative vulnerabilities to rising energy costs and supply disruption and a more hawkish sounding Bank of England.

"Investors are quick to cite GBP/USD weakness as an illustration of a potentially deteriorating UK macro outlook. However, the move lower to 1.35 is driven by USD strength rather than GBP weakness - against the EUR the UK currency is close to a YTD high".

Moreover, the Dollar is the second-best performing major currency of the year, with rising demand due to U.S. economic outperformance and forecasts of a rate hike next year.

"The move lower in GBPUSD spot can be blamed almost entirely on the rally in the USD. What seems to be happening is that the recent spike in energy prices is forcing market participants to discount a faster pace of central bank normalisation, which in turn is leading to a deterioration in risk sentiment," stated Stephen Gallo, European Head of FX Strategy at BMO Capital Markets.

Although the Pound enjoyed a strong start to the year – driven higher by the rapid Covid vaccine rollout and Brexit completion – the trend came to an end in April. Sterling has since traded sideways against the Euro and lower against the Dollar, with the outlook remaining mixed.