Last week the pound was the second worst performing currency after the yen. The latest developments are creating a more negative combination of weaker growth and higher inflation in the UK which economists at MUFG Bank believe is a bad mix for pound performance.
UK supply side concerns set to continue
“The recent underperformance of the pound can be partly explained by less favourable market conditions that have turned more risk averse over the last couple of weeks reflecting heightened concerns over downside risks to growth in China and globally.”
“The pound’s failure recently to track higher UK yields could reflect concern that tightening policy so soon into the COVID-19 recovery is an unfavourable development for the UK economy. The BoE is clearly starting to put more weight on dampening upside inflation risks than continuing to support the recovery.”
“Recent economic data has already shown a loss of growth momentum over the summer, and worsening supply side problems strongly suggest that growth could slow further heading into the winter.”
“We expect cable to fall further especially once support at the 1.3600-level is broken.”