British expats have this week been warned about the already weak pound becoming further pummelled in the months to the end of the year. Many – even those who have lived outside the UK for decades – still have close financial ties with Britain, including having UK pensions, amongst other incomes paid in pounds, investments, bank accounts, British property and other UK-focused assets. These expats have, typically, enjoyed sterling being stronger than the currency of their adopted new countries, meaning that they can afford a better standard of living as the pound goes further than the local equivalent. Therefore, warnings that the UK currency is about to be delivered another battering is of serious concern to many Britons living abroad. The stark prediction comes as the pound registered its most dramatic monthly decline in August against the dollar since October 2016 – the height of the Brexit referendum fallout. Sterling fell 4.5% last month to $1.16 and almost 3% against the euro. It has started September with a further 0.3% drop against the U.S. dollar.
What are the experts saying?
It’s heightened political and economic uncertainty that’s to blame, say experts. “We expect the pound to fall even further and more radically next week should Liz Truss be named UK Prime Minister as is expected,” said Nigel Green, CEO of deVere Group, which says it has 80,000 mainly expats clients. “Truss’s populist agenda – including the UK’s relationship with the EU and single market access and issues with the Northern Ireland Protocol – would trigger a negative reaction by the already weak pound.” The likely successor to Boris Johnson has also suggested reviewing the Bank of England’s mandate. “The pound will react badly to any sense of growing political interference.” Against this backdrop, expats with major exposure to UK financial assets should review their portfolios. As always, portfolio diversification across asset class, sectors, regions and currencies is an investor’s best tool to mitigate risk and seize opportunity.
‘Emerging market’ pound?
At the end of May, the Bank of America said Sterling is in danger of becoming an “emerging market” currency as falling growth and growing risks cause investors to flee the pound. At the time, BofA Senior G-10 FX Strategist Kamal Sharma said further weakness can be expected in the pound throughout the rest of 2022. He also dismissed comparisons between the monetary tightening paths of the U.S. Federal Reserve and the Bank of England, arguing that the reaction functions of the two central banks are different. “The challenges facing the BoE are unique along with a supply dynamic that it remains wholly unwilling to discuss: Brexit. This has resulted in a confusing communication strategy: hiking rates against a sharply slowing economy is never a good look for any currency,” he noted. “An alleviation of the current risk off environment and fiscal stimulus may provide some relief but the damage has been done and the outlook for GBP looks grim.”