Pound to fall further, but it’s not an EM currency

Although the slump in the pound to $1.14 earlier this week took it to its lowest level since 1985, the suggestions that it is turning into an emerging market currency are misplaced. The key difference is that the UK’s external liabilities are overwhelmingly denominated in sterling rather than a foreign currency. This means a fall in the pound does not push up the local currency value of those liabilities. In fact, as long as the Bank of England contains the second-round effects on inflation, a weaker pound can help improve the UK’s competitiveness.