British Pound Faces Strong Headwinds

Several influential analysts are predicting a major crisis in the value of the UK’s Pound Sterling. It is expected that the British currency will come off badly as it faces such competing forces as its widening current account deficit, a souring of its relationship with the EU over Northern Ireland and questions around the Bank of England’s (BOE) ability to respond to a cost-of-living crisis brought about by high inflation.

Commentators are saying that UK governmental policy is forcing the GBP to behave like an emerging market currency. They point to the UK’s inability to acknowledge the impact of Brexit as a significant headwind, as well as to the BOE’s erosion of credibility as it struggles to carry out its mandate.

The BOE has been criticized for its slow response to inflation, which is at its highest rate in four decades. As a result, the Sterling is the third-worst performing major currency this year.

Analysts are predicting a liquidity crunch for Sterling, which is normally well-traded. The policy uncertainty means investors will likely stay away from the currency as they watch the various macroeconomic factors play out.

What does this mean for me? 

For the FOREX trader, this analysis should put you on high alert. The Sterling is a major global currency and is normally one of the most traded. If the UK cannot fend off these major headwinds, it is not unreasonable to see the currency lose ground in the short- to medium-term.