The British pound has fallen to the lowest level since 1985 as the U.K.'s economic pain mounts
will enact and the Bank of England’s ability to control sky-high inflation are compounding the pound’s weakness.
“There’s a really bleak path in which you end up with the U.K. almost needing to go back to the [International Monetary Fund] for a bailout as a quasi-emerging market crisis,” said Mr. Dowding. In 1976, a pound crisis forced the U.K. to seek a $3.9 billion loan from the IMF. “That’s the very worst of scenarios,” he said.
Adam Cole, chief currency strategist at RBC Capital Markets, is worried that the typical positive relationship between U.K. interest rate expectations and the pound appears to have unraveled. Mr. Cole said the breakdown in correlation reflects doubts over whether the Bank of England’s plans to raise rates will ultimately succeed in controlling inflation.
For the most part, foreign investors have been happy to play that role, buying up U.K. companies, government debt, property and shares. One benefit of the weaker pound is that it makes assets look cheaper to foreign investors, as well as making U.K. exports more competitive abroad.
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