Pound Vulnerable to Stagflation Clutches as Brexit Impact Emerges

The pound is unlikely to be rescued by the increasing odds of a Bank of England rate hike as the currency may struggle to escape the clutches of stagflation just as the impact of Brexit begins to emerge. 

GBP/USD was flat at $1.3594.

“GBP’s fall from grace has been swift. Stagflation is the current buzzword which seems to be hitting UK harder than most,” Bank of America said, according to Forexlive.

“Our concerns about structural Brexit headwinds have crystallised. 2022 could put even greater focus and pressure on GBP,” BofA added as it maintained its bearish outlook on the GBP.

The malaise in the pound comes just days after the Bank of England governor Andrew Bailey hinted at a sooner rather than later rate hike to stave off the threat of inflation spiralling out of control.

“[We] have got to in a sense prevent the thing becoming permanently embedded because that would obviously be very damaging,” BoE Governor Bailey said on Saturday.

The Bank of England has held off any clear signaling on tighter amid uncertainties over the labor market outlook but as signs emerge that the unemployment rate is unlikely to pick up steam in the near term, the door to a rate hike is widening.

“Bailey thought that a pickup in unemployment over the near term was now unlikely, a view that was seemingly supported by the record high vacancy-to-employee ratio in today’s figures,” Daiwa Capital Markets said Tuesday.

“There is certainly a non-negligible chance of a 15bps hike in Bank Rate (to 0.25%) at next month’s MPC meeting, when the BoE will update its economic forecasts. And if that hike is not forthcoming, a clear signal of the likelihood of a hike before year-end might now seem more likely than not.”

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