Bank of America warns that the pound is facing a 'existential crisis'

One of Wall Street's biggest banks has warned that the pound is in the midst of a "existential crisis" and will likely drop further this year.

Sterling "finds itself in an increasingly invidious position," according to Bank of America, due to "increasingly challenging" Bank of England communication.

The pound's outlook, according to Kamal Sharma, a London-based foreign exchange strategist for the lender, is "grim."

The warnings came as the price of oil surpassed $120 (£95) per barrel on Monday, reaching a two-month high amid market tightness and supply concerns.

Oil prices have risen as a result of tight supply caused by Russia's war in Ukraine, as well as increased demand as more economies exit Covid-related restrictions.

China announced that its restrictions would be eased, while the European Union worked on a plan to prohibit Russian crude imports.

In dollar terms, the pound has lost about 6.6 percent this year, making it one of the worst performers among the world's major currencies.

The only currencies that have performed worse are the Norwegian krone, Swedish krona, and Japanese yen. On expectations that the Bank will not raise interest rates as quickly as its US counterpart, the Federal Reserve, it fell to its lowest level against the dollar in almost two years earlier this month.

"Sterling's fall from grace has been epic given last year's euphoria and in many ways has caught the investor community by surprise," Mr Sharma wrote in a note to clients. Threadneedle Street, he warned, is facing "unique" challenges, such as Brexit, which are causing severe supply-side issues.

"This has resulted in a perplexing communication strategy: raising rates in the face of a sharply slowing economy is never a good look for any currency," he said.

"We sense something is changing in the UK, with the Bank of England becoming increasingly difficult to decipher and less transparent; a failure to discuss and acknowledge that Brexit has been a significant headwind to the supply side, and a sense that the Bank of England is losing control over its mandate," he added.

The Bank of England is expected to raise rates five times this year, according to investor expectations. Mr Sharma claims that Bank of America analysts are "increasingly skeptical" that rate hikes will "save the pound."

"Though not our key scenario, we believe sterling is in a more precarious situation, where central bank communication has become increasingly difficult; where imbalances are rising; and where the specter of Brexit continues to loom large on the domestic political landscape," he added.

He warned investors that the pound is increasingly being compared to an emerging-market currency in terms of volatility.

"While we don't want to paint [the pound's] predicament as some kind of 'end of days' scenario, we are concerned that the increasing politicization of UK policy undermines the GBP in ways that appear [emerging market]-like... [it] is no longer the doyen of foreign exchange markets that investors believe it is," he said.


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