The British pound has recovered strongly against the US dollar over the last month, breaking through the $1.24 mark after hitting a low of $1.14 on the back of the pandemonium caused by the coronavirus.
But according to one of the world’s leading investment banks the rally may be coming to an end because on top of the issues that the coronavirus has caused, the UK economy still faces a raft of issues such as the upcoming Brexit negotiations which may once again put the British currency under pressure.
"Short GBP/USD is the preferred candidate to raise our long USD, defensive exposure once again after the rounds of profit-takes of recent weeks," says Patrick R Locke, a Strategist at JP Morgan.
"It would be wrong, in our view, to dismiss that slump as an unwarranted overreaction on the part of GBP to the COVID-19 fallout to compound of course the unique damage from Brexit. After all, the UK is more exposed to a sudden stop in global capital flows given the UK’s outsize current account deficit," says Locke.
The UK's current account deficit is closely connected with the confidence of overseas investors and because the UK import more than it exports, the pound needs a constant inflow of investor capital to keep it strong which at current times is simply not happening as money usually coming in from abroad is remaining at home to prop up the local economies.
The recent liquidity crunch showed just how sensitive the pound can be when the pound fell to $1.14 against the greenback in a relatively short period of time.
"The UK has a larger international balance sheet than its peer group which leaves GBP susceptible to a certain repatriation of foreign capital," says Mr Locke.
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