"As that dynamic changes and the Bank of England is much closer to stalling – it's a reluctant tightness, so to speak – you should see euro-sterling significantly higher. We see it above 90 pence by next year."and economists are expecting further contractions this year, as the country's cost-of-living crisis entrenches itself. Inflation jumped out to an annual 9% in April as food and energy prices spiraled.
The NIIP measures the difference between U.K. owned asset claims on non-residents and foreign-owned claims on U.K. residents, an important gauge of a company's creditworthiness. "This carries with it two risks: overseas investors could repatriate part of this portfolio of U.K. assets on deteriorating confidence in the U.K. economy ; or that the large stock of foreign holdings of U.K. assets will continue to weigh on the primary income balance," Sharma said.
"Whatever the reason, the external trade position will become an increasing focus for markets as the UK economy struggles under the weight of higher inflation and slower growth." U.K. assets are now more expensive than they were in 2021, when inflows to the country were significant, and the pound is increasingly considered less "undervalued" than models suggest, he added.