Investors predict BoE action as strong pound threatens UK

A strong pound could damage both the economy and portfolios as sterling hits new highs and the UK enters a technical recession for the second time in three years.

The Bank of England’s trade-weighted index, measuring sterling against a basket of currencies, reached 83.3 last Tuesday; the highest since August 2009.

It regained this level later in the week despite news a 0.2% contraction in GDP in Q1 has sent the UK back into recession.

The currency was trading at $1.623 against the dollar last week, a near eight-month high, and M&G head of retail fixed interest Jim Leaviss said sterling will increasingly become a focal point for policymakers.

“One of the stated aims of UK economic policy is to rebalance towards manufacturing. German industry has benefited massively from the weakness of the euro, but we are going through the exact opposite at the worst possible time. It is equivalent to a tightening of monetary policy,” said Leaviss.

“There are many subtle ways to get your currency down and talking about it is one way of doing that. You may see UK politicians spending more time talking about sterling. The currency is going to come under the microscope.”

The manager said the Bank of England (BoE) has not run out of conventional policy measures, but suggested a prolonged period of sterling strength could prompt it to consider selling sterling to bring the value of the currency down.

Leaviss has closed out a small position in sterling within his £86m Global Macro Bond fund in the view it is overvalued. He said the risks of holding the pound are too great in the face of the likelihood of more QE later this year and the potential for a downgrade of the UK’s AAA-rating.

Simon Callow, manager of the £214m CF Midas Balanced Growth fund, said sterling will be “the biggest issue to face UK-domiciled fund managers” over the next 18 months.

The multi-asset manager has reduced his sterling exposure and agreed the BoE may be forced to intervene in currency markets, as seen in Switzerland and Japan over the past year.

“One MPC member [Paul Fisher] has talked about sterling being a policy tool. That is something that should be looked at if we have prolonged sterling strength. We should adopt an interventionist policy,” he said.

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