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Felicia Tan
in
Forex
June 24 08:40

Bank of America advised to get rid of the "neurotic" pounds

"Neurotic" British pound could face a 10% deficit risk. BofA believes that sterling behaves like an emerging market currency.
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After years of problems with Brexit and Coronavirus, the pound again faces risks. Bank of America Merrill Lynch notes that the pound - the worst currency in the top 10 Group over the past half-century - will face increased turbulence, as the British economy, which survived the pandemic, faced the return of one of its worst problems - the double deficit, that is, the combined budget and current account deficit of the balance of payments.
The Bank believes that the double deficit will increase to 10% of UK output next year, which is higher than in Turkey and Mexico and the G20 average, amid the economic downturn and record government spending. According to BofAML, the deficit, reminiscent of developing countries, will be a serious obstacle to the pound at a time when uncertainty about Braxit and the pandemic still remains.
They recommended investors to sell the pound against the euro, the yen and the Swiss franc.
The OECD estimates that UK production fell by more than 11% this year after quarantine virtually stopped the economy. In addition, many in the market still have doubts about whether the UK will be able to close a trade deal with the European Union and avoid falling off the cliff at the end of the year. The Bank of England cut interest rates twice in March to 0.1% to support the economy. British government debt rose above 100% of gross domestic product in May, the first time since 1963, reflecting a sharp drop in economic output and rising spending.
The budget deficit in the current fiscal year could rise to the equivalent of 14% of GDP, according to the latest survey of private sector economists conducted by the Treasury. This will be the highest level since the Second World War.
BofA noted that the current economic situation in Britain has made GBP look like one of its competitors in emerging markets, and called the recent fluctuations "neurotic at best, incomprehensible at worst".
Over the last five years, the pound lost more than 21% of its value against the dollar, which is the biggest decline among the G-10 currencies. It also fell by a similar amount against the euro during this period. On Tuesday, GBP was weakened by 0.5% against the European currency to 90.73 pence.