* Graphic: World FX Rates in 2020 tmsnrt.rs/2egbfVh
*Graphic: trade-weighted sterling since the Brexit vote tmsnrt.rs/2hwV9Hv (Adds new milestone, comments analyst, rewrites)
LONDON, Sep 29 (Businesshala) – Sterling hit its lowest level since the end of 2020 against the dollar on Wednesday, eroding all of its gains for the year as concerns about rising natural gas prices and Petrol shortages in the UK improved globally in almost a week. equity markets.
The pound generally traded in line with global risk sentiment and was hit by a global equity sell-off on Tuesday as investors prepared for future rate hikes from global central banks, especially the US Federal Reserve.
Although shares staged a recovery on Wednesday, sterling extended its Tuesday losses and fell another 0.7%, its lowest against the dollar since December 28 at $1.3440.
Two consecutive daily declines – on a two-day basis, the worst since September 2020 – have left the pound flat against the dollar for the year.
Sterling was at one time the best-performing G10 currency in 2021, fueled by high hopes for an economic rebound in Britain on the back of the country’s vaccination programme.
This narrative is shattered by a post-Brexit shortage of lorry drivers, which has sowed chaos through British supply chains in everything from food to fuel, widening the specter of disruptions and price increases for Christmas.
Drivers have been buying fuel for almost a week after oil companies warned that they did not have enough truck drivers to carry petrol and diesel from refineries to filling stations, leaving pumps in major cities dry.
“The pound is still suffering from domestic shortfalls, high inflation and the prospect of a winter of discontent, bucking already upbeat expectations for the currency,” said Neil Jones, head of FX sales for financial institutions at Mizuho Bank. .
A key gauge of financial market expectations for UK inflation in the coming years, closely watched by the Bank of England, rose on Tuesday to its highest level in at least eight years, as gilt yields rose.
The supply crunch amid a broad spurt in government bond yields has also pushed the market measure of inflation expectations to their highest level in at least eight years.
The swap linked to the five-year, five-year forward inflation – a proxy for inflation expectations over the next five years – rose to 3.905%, the highest since the daily record published by Refinitiv in 2013, and up from 3.878% on Monday. up.
The move reflects growing confidence among investors that rising inflation in the UK will not prove to be as transient as the Bank of England hoped, with supply chain problems rising into a full-blown crisis over the past week.
Valentin Marinov, head of G10 FX research at Credit Agricole, said: “Investors are concerned about the risks of an impending recession that could stall the UK economic recovery and have asked the MPC (Monetary Policy Committee) on its plans for policy normalisation. may force you to reconsider.”
A less active Bank of England could result in even more negative UK rates and gilt yields, Marinov said, adding that a short position on the pound is the “best stagflation hedge” the G10 market can offer at the moment.
Bank of England Governor Andrew Bailey is scheduled to speak at a forum in Sintra, Portugal, on Wednesday.
Analysts have offered competitive explanations for the pound’s move, including a rally in natural gas prices, month-end portfolio rebalancing, long positions in leveraged funds and a broad decline in risk sentiment.
“Gas prices are rising in extreme ways, so why not FX as well? The concern for macro investors is if GBP becomes a market that will become truly unpredictable,” say Jordan Rochester and George Buckley at Nomura Said in a note.
“Perhaps the UK continues to suffer from headline shock risks, as it used to be in the Brexit politically driven GBP era (2016-2019), a time when many macro investors looked elsewhere for more thematic-driven trades This is something we don’t expect for quite some time, but a risk we can’t ignore on days like this.”
Others, such as Kamal Sharma of BoFA Global Research, point to a rebalancing at the end of the month and Stephen Gallo of BMO Capital Markets also cited the situation.
“We pin the sentiment shift in GBP during the last 24 hours to a decline in risk sentiment and a risk-off clearing in GBP long near leveraged funds,” he said.