The pound is now more akin to a liquid emerging market currency than a core G10 currency, according to analysts at Bank of America, who say that Brexit has turned it into a mirror of the “small and shrinking” UK economy.
Writing to clients on Tuesday, exactly four years after Britain’s referendum on EU membership, Kamal Sharma said that movements in the currency since June 2016 have become “neurotic at best, unfathomable at worst”.
He added that sterling is evolving into a currency that resembles the underlying reality of the British economy: small and shrinking with a growing dual deficit problem.
Safest currencies in the world
Traditionally, sterling has been part of the so-called G5 currency group — alongside the dollar, the euro, the Japanese yen and Swiss franc — as one of the most heavily traded and therefore safest currencies in the world.
But since the Brexit vote, it is better matched with the Mexican peso than the US dollar.
“The pound increasingly resembles the more liquid emerging market currencies rather than a core G10 currency,” Mr Sharma wrote in a research note to clients.
Sterling plunged to a multi-decade low against the dollar in mid-March, before recovering after the US Federal Reserve and other major central banks stepped in to cool the dollar.
But on-off trade talks between the UK and the EU have hurt sentiment towards the pound.
Headwinds are continuing to build for sterling, said Mr Sharma, given the year-end deadline for finalising the EU trade relationship and the country’s persistent current account deficit.
“We believe sterling is in the process of evolving into a currency that resembles the underlying reality of the British economy: small and shrinking with a growing dual deficit problem similar to more liquid [emerging market] currencies,” he said.