Sterling struggles as investors lose faith in Conservative competence –

Although shortages are worldwide, investors appear to be honing in on the UK as an epicenter of supply chain chaos.

“The panic and hysteria in the UK partly reflects a growing lack of confidence by the public in the Government’s ability to manage the economy and fix problems when they arise,” says Berenberg economist Kallum Pickering.

He says panic buying is akin to bank runs by shoppers lacking confidence. It risks becoming a “feature of the UK economy”, which “remains one of the richest and, at least until recently, well managed in the world”.

“A noisy and economically damaging Brexit followed by a worse than average response to the pandemic has left the UK public and financial markets with more than a faint impression that the UK is performing well below its potential,” adds Pickering.

Even before the latest crises, sterling was particularly vulnerable to a slide on currency markets if confidence overseas dwindled. The UK has a large current account deficit – when the value of imports of goods, services and investment is greater than that of exports.

“It brings the potential for overseas investors to turn their back on the pound,” explains Rabobank’s Foley.

Supply chain problems are hitting the UK as government policy takes a big step into the unknown post-Brexit. 

A new immigration system appears unable to cope with worker shortages and Brexit uncertainty threatens to rear its head as the UK warns it could trigger Article 16, allowing it to override parts of the Northern Ireland Protocol.

“The hangover and scarring of investor confidence from Brexit is still there,” says Jordan Rochester, currency analyst at Nomura. “That plays a part in investment decisions for investors when it comes to the pound.”

Foley adds: “Until the Government can prove that its post-Brexit policies are functioning efficiently, sterling could remain vulnerable.”

Worries over the competence of the Bank of England, meanwhile, are also mounting as investors’ expectations for inflation and interest rate rises run ahead of central banks’. Analysts believe currency markets are becoming nervous about the Bank’s ability to contain inflationary pressures.

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