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Sterling s worst session in a year has analysts once again comparing its gyrations to currencies like the Mexican peso or South African randAfrican rand, but not the dollar or euro.
The developing-market parallels were first drawn within the U.K. s tortuous exit from the European Union. They re made a comeback after the possibility of early rate hikes by the Bank of England failed to stem the pound s rout this week.
Price action begins to resemble that of an emerging-market currency, says Adam Cole, chief currency strategist at RBC Europe. It is probably too early to conclude that a major derating of U.K. assets is underway, though the trend remains in effect. Sterling s volatility during years of Brexit negotiations often had more in common with liquid nations struggling with commodity corruption and weak institutions endemic than the commodity dependent group-of--10 currency categories it belongs to. Last year, Bank of America called the moves microtic and said they correlated with developing nation currencies.
At stake this time is the BOE s credibility in both fighting inflation and ensuring that the economic recovery isn t knocked off track. Even former bulls are worried with Nomura strategists saying on Wednesday that they closed a long position against the U.S. dollar.
Any support from sterling by a tighter monetary policy is more than offset by concerns that an earlier tightening will simply exacerbate the slowing pace of economic recovery, said Stuart Cole, head macro economist at Equiti Capital. There can be negative consequences if the central bank is forced to choose between policy which curbs the economy or supports price growth, he said.
It s a difficult balance for a country that is still adjusting to Brexit and shaken by the recent spike in oil prices and panic-buying that has left gas stations and supermarket shelves empty. The BOE sees inflation exceeding 4% and has signaled a rate hike could come before the end of the year.
While BofA analysts suggested on Wednesday that the pound moves were being amplified by the end-of-month rebalancing, some strategists had gone as far as to question its status as one of the world s leading currencies.
The pound is losing inflation credibility, said Nomura's Jordan Rochester. The concern for macro investors is if Sterling becomes a market that would become truly unpredictable. None Most Americans in the US believe the stock market is Rigged, and they re right None A tiny piece of plastic Is Helping Farmers Use Far Less Water Remedial
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