Home > Top 3 reasons to be bearish sterling in 2022

Top 3 reasons to be bearish sterling in 2022

The Bank of England surprised financial markets yesterday by delivering a rate hike when nobody expected one. Sterling bounced on the news, but the bias into 2022 remains bearish. 

Sterling jumped on yesterday’s news that the Bank of England raised the interest rate. The unexpected news took the market by surprise as the central bank did not hint at tightening the monetary policy on previous occasions.

Yet, despite the Bank of England raising rates before the Fed and well ahead of the European Central Bank, there are few reasons to cheer for the pound. Here are three factors that may weigh on sterling next year: the UK economic recovery lagged behind that of its peers, export keep shrinking after Brexit, and higher taxation would hurt business sentiment.

UK economic recovery lagged behind that of its peers

The COVID-19 pandemic took the attention away from Brexit, but the consequences of the messy divorce from the European Union are still visible. Moreover, they will persist for years or even decades.

A quick comparison between the economic growth in the United Kingdom and a peer group of countries (Germany, Italy, Spain, Netherlands, France, Canada, Sweden, South Korea) reveals that the UK economic growth has lagged since the EU referendum. Furthermore, when the pandemic hit, the economic contraction was more severe in the UK, and so was the subsequent bounce.

Exports keep shrinking after Brexit

Another direct consequence of Brexit is the weak export activity. In sharp contrast to what happened in global trade, the UK exports declined significantly. One danger here is the Northern Ireland protocol. If the country withdraws from the protocol, there is a significant risk of trade retaliation from the European Union.

Higher taxation would hurt business sentiment

The UK government recently announced increasing corporate taxation by 6% to 25%, starting with April 2023. While it is only December 2021, the trend towards higher taxation is visible and would hurt business sentiment before implementing the tax hike. As such, investments may be postponed, further affecting the economic performance.

All in all, the pandemic shifted the attention away from Brexit and its consequences. However, the risks highlighted here exist and are enough to trigger weakness for the British pound in 2022.

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