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LONDON – The British pound hit its lowest level since the end of 2020 against the dollar on Wednesday, wiping out all of its gains for the year as concerns over soaring natural gas prices and nearly a week of shortages Britain’s oil prices outweighed a recovery in global stock markets.

The pound generally trades in line with global risk sentiment and was hit by a massive sell-off of global equities on Tuesday as investors braced for future rate hikes from global central banks, notably the U.S. Federal Reserve.

Although stocks staged a rally on Wednesday, the British pound extended its losses on Tuesday and fell further 0.7%, to its lowest level since Dec. 28 against the dollar at $ 1.3440.

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The two consecutive daily declines – on a two-day basis, the worst since September 2020 – have left the pound stable against the dollar for the year.

The pound was at one point the best performing G10 currency in 2021, boosted by high expectations of an economic rebound in Britain thanks to the country’s vaccination program.

This narrative has collapsed under the weight of a post-Brexit shortage of truck drivers that has wreaked havoc on UK supply chains in everything from food to fuel, raising the specter of disruptions and increases of prices in the run-up to Christmas.

Drivers have panicked for fuel for nearly a week, leaving pumps running dry in major cities, after oil companies warned they did not have enough truck drivers to carry gasoline and fuel. diesel from refineries to gas stations.

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“The pound continues to suffer from the perception of domestic shortages, higher inflation and the prospect of a winter of discontent weighing on previously optimistic expectations for the currency,” said Neil Jones, head of currency sales, financial institutions at Mizuho Bank. .

A key indicator of the financial market’s expectations for inflation in Britain over the next several years, closely watched by the Bank of England, hit its highest level in at least eight years on Tuesday, as yields gilts leapt.

The tight supply also pushed the measurement of market inflation expectations to its highest level in at least eight years, against a backdrop of larger increases in government bond yields.

The five-year and five-year inflation-indexed swap – an indicator of inflation expectations over the next five years – rose to 3.905%, the highest since the start of daily records released by Refinitiv in 2013, and against 3.878% Monday.

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The move reflected investors’ growing belief that rising inflation in Britain will not prove to be as transient as the Bank of England hopes, with recent supply chain problems turning into a widespread crisis in the UK. over the past week.

“Investors are worried about the looming stagflation risks that could derail Britain’s economic recovery and force the MPC (Monetary Policy Committee) to reconsider its policy normalization plans,” said Valentin Marinov, head of G10 FX research at Crédit Agricole.

A less proactive Bank of England could lead to even more negative UK rates and gilt yields, Marinov said, adding that a short position in the British pound is the “best hedge against stagflation” the G10 market can. offer for the moment.

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Bank of England Governor Andrew Bailey is expected to speak at a forum in Sintra, Portugal on Wednesday.

COMPETITIVE EXPLANATIONS

Analysts have offered competing explanations for the pound’s move, ranging from the surge in natural gas prices, month-end portfolio rebalancing, long positions in leveraged funds and the broader decline in sentiment. risk.

“Gas prices are moving in an extreme way, so why not also on FX? The concern of macro investors is whether the pound sterling becomes a market that will become truly unpredictable, ”Jordan Rochester and George Buckley of Nomura said in a note.

“Perhaps the UK suffers from permanent shock risks, as it used to during the politically pound-focused Brexit era (2016-2019), at a time when many macro investors were looking elsewhere for more thematic trades.This is something we don’t expect to happen for a considerable time, but it is a risk we cannot ignore on days like this.

Others, like Kamal Sharma of BoFA Global Research, expect a rebalancing at the end of the month and Stephen Gallo of BMO Capital Markets also cited the positioning.

“We attribute the change in sentiment in sterling over the past 24 hours to deteriorating risk sentiment and a risk-free cleanup of long sterling positions held by leveraged funds,” he said. -he declares.

(Reporting by Ritvik Carvalho; editing by Philippa Fletcher)

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