In the latest instalment of the ‘Four graphs explaining' series, experts consider sterling.
Chester Ntonifor, chief forex strategist at BCA Research
The dominant driver for currency values tends to change from time to time (interest rate differentials, terms of trade, valuation and so on).
For cable in 2024, the roaring engine will be balance of payments.
The evidence is in the strong correlation between the pound and global stock prices. As a net debtor nation, the UK needs foreign capital to fund its current account deficit.
When investors are willing to take on more risk, they are enthusiastic about allocating capital to deficit nations, in anticipation of a better returns.
These capital inflows into the UK have been a key driver of sterling given high interest rates, a cheap pound, and an undervalued equity market.
When investors become more risk averse, capital preservation becomes key.
If we enter a recession in 2024, then cable could face much turbulence, as investors tighten their belts.
