Interesting blog here on a mechanism whereby the pound could be forced even lower:
- The fall in global reserve growth will cut into central bank demand for pounds no matter what. Countries like India that have long had a higher pound share are no longer adding to their reserves. Russia also liked the pound and its reserves are falling. If other central banks dont buy pounds (and sell other currencies) as the pound falls to maintain the pound share of their portfolios, one big source of support for the pound will wither away.
Furthermore the consequences may not be good:
- And while low policy rates have, so far, been good for the dollar, they havent been good for the pound. Specializing in finance no longer seems like the sure path to national riches. Private demand for pounds has fallen even more rapidly than central bank demand. Equilibrium in the market will only be restored when the pound falls enough to make pound-denominated assets a bargain and when the current account deficit contracts enough to reduce the UKs borrowing need.
Neither is pleasant.
How low could the pound go, and what are the consequences? The question on whether it moves the UK closer to the Euro has been asked before, but I’ll put it slightly differently — is there a point whereby the collapse of the value of the pound effectively forces the decision? Any guesses on what that point might be?