It requires about £10BN a month in foreign investment to keep Sterling stable and the nature of recent political rhetoric has UniCredit's Erik Nielsen worried that it is becoming harder to attract these kind of flows.
The GBP's direction lower is a given aruges the Global Chief Economist at UniCredit Bank in London.
Erik Nielsen believes that what matters now is not only whether the UK will maintain its access to the single market, but, more generally, policies on businesses.
UniCredit's team of exchange rate analysts confirm they remain bearish on the exchange rate over and above the 17% drop in sterling seen over the past three months.
But, their Global Chief Economist is a little more bearish.
Nielsen cites the Pound’s soft underbelly which remains exposed to the country’s current account deficit of about 5.7% of GDP – “which translates into a need to attract foreign capital to the tune of about GBP 10bn a month just to finance the over-consumption and to keep the FX stable.”
But it’s no longer just about Sterling argues Nielsen who sees the potential for the UK to travel down a less business-friendly avenue.
Mark Carney and the BoE were seen as the “guarantor” of whatever monetary accommodation would be needed, so that anchored the curve, and lent support to the stock market.
Prime Minister May seemed to suggest that monetary policy will be tightened to create positive interest earnings for pensioners and savers, and Home Secretary Rudd said that companies will be forced to publish lists of how many foreign employees they have.
“But with PM May’s and Rudd’s recent remarks, markets – correctly – started to wonder about the business environment, and even about the BoE’s independence and/or willingness to be as aggressive as assumed,” says Nielsen.
When asked during an interview in Washington whether he would comment on his future plans, Mark Carney chose to reply “no” – rather than repeat his previous statement of interest in staying longer than the five years he originally pledged.
“Of course, it’s still possible that May’s statement was simply poorly scripted, and we’ll see her back-pedal on this one,” says Nielsen.
Yet, this is certainly a potentially new point of weakness that Sterling could be exposed to over coming weeks.
For Nielsen the number-one UK question is as follows:
“Will the Sterling collapse and other market sell-off cause PM May and her government to reconsider their policy direction? I hear people arguing that she’ll have to do that.”
“I hope so, but I’m less sure. Personally, I could see parity to the euro,” says Nielsen.
Nielsen therefore sits alongside his peer at HSBC, David Bloom, in anticipating a 1:1 exchange rate.
While Nielsen “personally” anticipates GBP/EUR parity it must be noted these are not UniCredit’s official forecasts.
UniCredit’s official forecast for EUR/GBP is for 0.93 by the end of 2016, where it should stay until the end of the first quarter 2017 before falling to 0.91 by mid-2017.
It is currently forecast to end the year lower at 0.90.
Swinging the pair around to GBP/EUR, 0.93 = 1.0753, 0.91 = 1.10 and 0.90 = 1.11.
GBP Remains Under Pressure, Johnson Sees Strong post-Brexit Trade Deals
Pound Sterling is falling against the Euro at the time of writing having relinquished a mid-week bounce.
Sterling rallied on Wednesday following the news that Prime Minister May would allow parliamentary scrutiny of the Brexit process which markets saw as a turn towards a soft-Brexit.
There were hopes that the relief-rally triggered on Wednesday would have extended further but it appears this is unlikely.
We have since heard from the Foreign Secretary Boris Johnson that the UK would get a trade deal of greater value with the European Union than that currently enjoyed.
Johnson told the Foreign Affairs Committee that Commonwealth countries were "stepping up" to reach agreements.
"You seem to think the single market is like the Groucho Club or something. We are leaving the European Union and will continue to have access to trade and services from the EU.
"Those who prophesied doom have been proved wrong and will continue to be proved wrong."
The remaining 27 EU states had "a huge interest" in agreeing a deal which would allow the UK to continue to trade its goods and services, and it was "complete nonsense" to suggest that trade links were dependent on allowing free movement of people.