It’s a bad day for the pound, even worse than the bad day last week.


According to the FT:

The pound fell 0.8% in morning trade in London to $1.137, the first time it has breached the $1.14 mark in nearly four decades, according to data from Refinitiv. The move reflected broad dollar strength as well as particular concern about the state of the UK economy.

Time being a flat circlethat last slide lands 30 years to the day since Black Wednesdaywhen the pound plunged when Britain exited the European exchange rate mechanism.

Covering this reference ignominious flavor used to produce déjà vu Moments: If Cable is at a potential resistance point around $1.14, we could see several more “new 37-year lows” headlines before things settle down.

The alternatives are a rebound (!!!), or that the pound now enters some sort of continuing death spiral, meaning it won’t continue to make headlines for the “worst since” as it is heading towards its 1985 lows. This is a relief for financial journalists (🎻👌), and precisely for no one else.

The pound has had a horrible year against a strong dollar:


In a larger sense, it’s just about having a terrible year. Here’s the Bank of England’s trade-weighted sterling index, which shows the currency down around 6.5% against a basket of other currencies:


Against the euro, it looks bad but not quite terrible:


For some people, that may be enough insurance, but given the dominance of the dollar in the global financial system, having a cable near four-decade lows is not good.

The biggest worry, however, is how hard it is to see things improving from here.

Today’s decline followed retail junk sales figures. The quantity of goods sold in the UK fell 1.6% in August according to the Office for National Statistics, against an expected 0.5% drop. It’s bad.

Unfortunately, it looks like the decline can partly be attributed to the return from summer vacation. Here is Barclays’ investment science team, led by Ben McSkelly, in a note published today:

We think there are a few plausible theories as to why spending is slowing.

1) Overseas summer holidays have rebounded so other services spending is down because consumers are not physically in the UK to spend in pounds.

2) Consumers reduced their spending to pay for holidays abroad.

3) Consumers generally reduce their spending in the face of the rising cost of living.

You can’t really blame people for going on vacation given all the pandemic that’s been going on lately. But from a sterling perspective, it’s the worst thing they can do.

In theory, the defender for the pound should probably be the BoE, which insists it does not target the exchange rate. Catherine Mann, a hawkish member of the External Monetary Policy Committee, previously argued for rapid rate hikes try to support the pound sterlingclaiming that by doing so, the effect of currency weakness on import prices can be mitigated.

Deutsche Bank’s George Saravelos – who is in a bit of a nerdy row with Barclays over how the pound is screwed up – says the Bank “needs to step up”:

We showed last week that the British pound in particular is exposed to serious balance of payments financing problems. Of course, this will not manifest in the same way as in 1992 or 1976 because there is no monetary peg to break. But it does mean the exchange rate is vulnerable to extreme dislocation if the Bank of England does not step up its response. A record current account deficit and a fiscal expansion of more than 5% of GDP financed at a real return of -1% will simply not be enough.

But Threadneedle Street is taking heat from several angles: even as its main peers (the Federal Reserve and the European Central Bank) have opted for increases of 75 basis points, the BoE is facing the double whammy of having to adapt to changes in UK fiscal policy and a rapidly darkening economic picture.

Here is the Barclays economics team:

We expect the Bank to increase 50 basis points at its September meeting and approve the launch of its QT program, subject to market conditions. But the government’s energy program and increasingly unfavorable economic data should force the Bank to revise its rhetoric toward more gradual tightening, likely in November.

Ugly data such as this morning’s – and the likely GDP that the UK’s mandatory sad state will deal with – further ties the hands of the BoE (the Old lady also did little to show belief in postponing until next week a rate hike that should have taken place yesterday, on the inexplicable idea that it somehow honors the Queen’s memory).

And, as Rabobank’s Jane Foley notes, it may be too late for breathtaking hikes:

The promise of higher interest rates is no guarantee of sterling strength when the economy faces recession.

There’s a pretty compelling case that the only way is down.

The markets seem to be preparing for such a possibility. After a period of recovery, the net positioning on the GBP/USD has taken a new bearish turn:


Curiously, this reflects a schism between asset managers and leveraged funds: see the chart below, of the gap between the positionings of the two groups. It is the widest since 2006. Hedge funds, which are about the longest sterling in four years, are in danger of being burned.


Looking more closely at positioning, there is a large buildup of rather bearish puts in place for December – traders don’t seem to be betting on parity this year, but record lows are now frequently bet:


This all bodes pretty badly for the pound. As SocGen’s Kit Juckes said in a note last week:

Chances are King Charles III will be the first British monarch to pay more than a pound for a dollar, or more than a pound for a euro, or both.

Hope everyone enjoyed their summer vacation – maybe Turkey next year?