The UK economy is hard-wired to weaken its currency over the long-term, according to new analysis conducted by HSBC.
HSBC shows that the UK economy is unlikely to command a currency that can rise over a multi-year timeline unless it can shake its addiction to imports, something that leaves the pound reliant on the money of external investors. The UK is a net importer meaning it spends more than it earns, which represents a ‘core’ economic problem for the pound.
“Having a strong core is also crucially important for currencies. Having a strong and stable source of funding provides a backdrop for less vulnerability and ultimately a good base from which a currency can make gains,” said Dominic Bunning, head of European FX research at HSBC.
Bunning reportedly added: “For both the EUR and GBP, things are looking increasingly worrying on this front. But the deterioration in both currencies’ core balances is becoming a more concerning medium-term threat.”
The UK’s current account deficit has widened as the UK imports more commodities, as well as all sorts of other goods. Sterling is only able to maintain value if this deficit is funded by other means, usually via the inflow of money from international investors looking to snap up UK assets.