GBP

A somewhat more bearish outcome for pound would likely come from a more protracted and pronounced period of UK and global economic weakness, especially if it occurs with inflation still well above target. A “stagflation” scenario – in which growth stays weak, and inflation remains uncomfortably high – could accentuate the country’s yawning current account deficit (~3.7 percent of gross domestic product). A further deterioration in an already-precarious balance of payments position could see the pound adjust lower to attract the capital needed to fund the external imbalance. GBPUSD versus UK terms of trade

While the UK’s higher interest rate structure might help the pound hold up against the US dollar, we see it underperforming other currencies such as the euro and Japanese yen over the third and fourth quarters – and progressively losing ground against the Australian dollar as 2023 rolls on. This reflects our comparatively-bearish take on the country’s economic prospects, exacerbated by a persistently large current account deficit and weaker terms of trade.The British economy has so far held up better than anticipated. But with interest rates moving deeper into restrictive territory, and real wages remaining negative, we believe a sharp...