"Tide of pessimism" hits the UKUK citizens more impacted than EU counterpartsGovt. failing to offer support - reportExpect further GBP weakness says BNP Paribas

Above: Chancellor Rishi Sunak is not yet willing to offer meaningful support to inflation wary consumers, and this could contribute to GBP weakness says an analyst. File image: © HM Treasury, Gov.uk

An inflation-wary public and a government reluctant to help are two important reasons to expect further weakness in the British Pound over coming months say BNP Paribas and Nomura.

They join other analysts in saying Sterling could fall further against the Euro and Dollar as the UK economic outlook deteriorates and prompts the Bank of England to ease back on hiking interest rates.

"UK consumers are particularly reliant on gas in their energy mix, leaving them vulnerable to higher gas prices, and high and still-rising inflation is likely to continue to weigh on the consumer and further erode dwindling savings accrued during the pandemic," says Parisha Saimbi, G10 FX Strategist at BNP Paribas in London.

The UK economy is expected by economists to slow sharply over the remainder of 2022 and into 2023 as the UK experiences a surge in inflation, punishing consumers and hitting business margins.

Despite the surge in prices the UK government has thus far refused to offer meaningful fiscal support to cushion the blow of the surge in prices.

The government's reluctance to offer notable fiscal support can be added into the mix of concerns weighing on the Pound; "we expect the UK to tighten its fiscal policy more than any other G10 nation this year," says Saimbi.

Indeed, the UK government holds the questionable status of being alone amongst G10 peers in hiking taxes into a slowing economy.

“It’s so important to note that of the major economies, which one has raised taxes? The UK. Very few others have done that,” says Jordan Rochester, a strategist at Nomura, in an April 29 podcast.

“Indeed, I think that’s a big part of why the Pound has been so weak over the past week or two as well as the situation with Shanghai and gas prices,” Rochester added, in conversation with colleague George Buckley.

The extent of the UK's problems is laid bare in a new report out midweek detailing "the tide of pessimism sweeping through Britain's households is unmatched elsewhere among Europe's major economies".

Reuters research finds that although people all over Europe face their highest rates of inflation in decades they are not displaying "an outright collapse of confidence" which "is an acutely British problem."

The European Commission regularly tallies up consumer confidence data and adjusts them to give a cross-country comparison of sentiment.

It clearly shows the UK consumer is unhappy:

Above image courtesy of Reuters.

This finding is bad for the UK economy which is heavily orientated to services and consumption and for the Pound this divergence is hardly helpful.

If the UK consumer is unhappy, so too will the economy and its currency.

Meanwhile UK Chancellor Rishi Sunak continues to resist calls to extend support measures for households, saying he will look at the situation again in the second half of the year when energy prices are due to rise again.

This suggests that measures might be announced by the time of the Autumn budget statement.

Some economists say it is highly likely the Chancellor will announce fresh support measures ahead of the winter which will ultimately result in better economic outcomes than currently forecast by the Bank of England.

BNP Paribas expects the Bank of England to deliver up fewer interest rate hikes than the market currently expects, which will pressure the Pound lower.

"As the Bank of England continues to push back against the markets' extensive pricing of rate hikes, and eventually pauses its tightening this year, we expect UK-RoW rate spreads to narrow and the GBP to weaken," says Saimbi.

BNP Paribas expects one further hike in June then a pause for the rest of this year.

As a result, BNP Paribas expects EUR/GBP to rise to 0.86 (Pound to Euro equivalent: ~1.1628) and forecast GBP/USD to remain flat this year.

However risks to GBP/USD forecasts look skewed to the downside given the extent of USD strength seen in recent months says Saimbi.