“We expect the pound to fall apart” is the bold prediction for sterling’s fate from Federico Cesarini, head of developed-market currencies research at Amundi SA, Europe’s largest asset manager. I’m all for analysts expressing a clear view, and everyone is entitled to an opinion, but this unequivocal stance suffers from one major flaw: Currency values are relative. Sterling will be just fine if the dollar maintains or extends the 5% decline it’s posted in trade-weighted value since early November — which looks likely to me.
Amundi’s premise is that the UK economy will collapse as the Bank of England leaves rates too high for too long. Along with interest-rate differentials, the main determinant of currency values is relative expectations of economic performance. There’s not much for the UK to shout about as the economy has flatlined for the past two years, and pandemic fiscal stimulus wore off just as the central bank embarked upon a 14-step, 515 basis-point rate-hiking cycle. Gross domestic product contracted by 0.3% in October, but is expected to post modest growth for the rest of the previous quarter with little evidence of conditions dramatically worsening.
