UK Can Face A GBP Currency Crisis This Year

Analysts are warning that too many GBP currency notes are in the market. Over supply of GBP in the market can easily turn into a currency crisis. GBP is not an international reserve currency and people may not want to hold it without limit. The fundamental problem that can lead to this currency crisis is UK Current Account Deficit which was 6% of the GDP in the 3rd quarter of 2014. Since June 2014, GBP/USD has fallen down 2000 pips.

Carl Weinberg, chief economist at High Frequency Economics, told CNBC this week that sterling risked a “very big move of very dramatic proportions” as a result of this deficit.

“I think we are at risk of seeing the world just have too many pounds out there to absorb. And sterling is not the world’s reserve currency, people don’t want to hold it without limit,” he said, adding that a crucial moment for the U.K. currency could come “very soon.”

The U.K.’s current account deficit was 6.0 percent of gross domestic product (GDP) in the third quarter of 2014, according to the country’s Office for National Statistics (ONS). This was a rise from 5.5 percent in the previous quarter and the ONS highlighted a fall in receipts for foreign direct investment, and a rise in payments to foreign direct investors, as an explanation. The limit set by European Union – from which the U.K. has exempted itself – is a deficit of 3 percent of GDP and the current account deficit in the U.S. stood at 2.3 percent of GDP for the last two quarters.

“The balance of payments right now is appalling,” Weinberg said. “Every time it’s been above 4.5 percent we’ve had a sterling crash,” he added.

Other analysts are dismissing this analysis too apocalyptic. They think instead of a sterling crash, a correction might take place. Whatever, Bank of England will be monitoring the situation keenly and it is hoped wont let the situation get out of hand. Last year, GBP/USD became bullish when UK economy performed better than expected and market analysts started predicting an interest rate hike. However when the Bank of England Governor publicly stated that there will be not interest rate hike, GBP/USD downtrend started which is continuing even now.