Six years ago exactly, the Pound plummeted. The Brexit earthquake, with the British running, against all expectations, voting to leave the European Union, knocked out the pound that Great Britain had decided not to abandon in favor of the euro. The fear of a collapse of the British economy, and the unknowns of a farewell to the EU, which has never happened before to any member state, caused Her Majesty’s currency to collapse: there was a 20% decline in a few months, from 1 , 4 to 1.20. There were those who even prophesied parity with the euro, on the expectations of a Brexit apocalypse.
Six years later, with Brexit now over and over, the pound has never dropped to par with the euro, nor have there been the feared collapses. On the contrary: at the end of the year and at the beginning of 2022, the British banknote was at its highest in recent years against the euro, above 1.20 on the single currency. Within a few weeks, however, the pound is back in the cyclone and is rapidly losing positions against the euro and the dollar.
2022 is the black year, so much so that on many media the pound is defined as the “sick man of the world” among currencies: it is the one with the worst forecasts among rich countries. Again traded around 1.15 on the euro, even worse on the dollar which dropped to around 1.2, a low not seen since October 2020. This is a drop of almost 10% in about three months. It is a very rapid decline, which is explained by a bet, to the downside on the country: hedge funds have changed position on the pound. Data from the US futures market shows that hedge funds have started betting against the pound – a bet that is now worth nearly $ 5 billion, according to some data reported by Reuters. Speed was crucial. Shortly before the Russian invasion of Ukraine on February 24, data from the Commodity Futures Trading Commission showed that the funds held a small long position on the pound and the pound was trading around 1.4 against the dollar. Nine weeks later, the funds are “short” in sterling for a total of 58,914 contracts – the largest bet against the pound in two and a half years.
The turnaround of hedge funds is a consequence of the impending economic recession. The Bank of England itself fears an economic “apocalypse” in 2022. These are the effects of the post-Covid world, which has seen inflation take off; and the war in Ukraine which has given a blow to the cost of energy. The cost of living is rising at unsustainable rates: inflation is expected at 10% at the end of the year, or household incomes are eroded to pay bills and rents. With less consumption, in an economy that lives only on services, the economy slows down. So then the hedge funds are sniffing the “prey” and are taking a stand.
And this is where Brexit comes into play: after leaving the EU, the United Kingdom, which does not import energy but imports a lot of food and semi-finished products, has strengthened non-EU trade agreements to compensate for the loss of the single market. Agreements that have so far worked also thanks to a hard currency. For an importing country it means purchasing power. But with a weak pound, importing goods from Australia, the US and Turkey, to name just three of the largest exporters to the country, becomes much more expensive. And therefore, in a cascade, even more inflation and an economy even more in difficulty. And therefore even more sales on the currency by hedge funds. In addition to the cost of living crisis, Britain risks entering a negative spiral that bounces between the pound and the real economy. Another additional problem for the Bank of England which, the first central bank in Europe to raise rates, is now caught in the middle of a crossroads: to curb inflation it should raise the cost of money again, but in this way it risks fueling the recession. Stagflation is the evil of 2022.