Sterling may fall due to 'toxic cocktail' of problems
STERLING may soon fall against the dollar because of a "toxic cocktail" of problems in the UK, Royal Bank of Scotland said yesterday. The pound is threatened by current-account and fiscal deficits as well as growing political risks and interest-rate changes, the bank said.
Investors should sell the pound against the dollar on a "tactical" basis, RBS strategist Paul Robson said.
Sterling fell against the dollar last week on signs the recovery is losing momentum, paring gains in the past 12 months that have made the currency the best performer among its major peers. Improving economic data has prompted bets that the Bank of England will bring forward plans to increase interest rates.
"Over the next 12 months, rising political risk and less favourable moves in rate spreads may see more intense focus on the twin deficits," Mr Robson said. "This is a potentially toxic cocktail for sterling. Our view is that the pound may be slipping through $1.60 (€1.16) toward the end of the summer."
The UK's current-account deficit, which measures the total imports and exports of goods, services and financial transfers, was at £22.4bn in the fourth quarter, compared with a record of £22.8bn in the previous three months.
The UK currency has rallied 9.7pc in the past 12 months, the best performer among 10 developed-nation currencies tracked by Bloomberg. The dollar climbed 0.5pc and the euro appreciated 6.9pc.
"The pound may have fully priced the good economic news, with markets looking for a February or March first Bank of England's rate increase," Mr Robson said.